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Consumer Credit Law A Consultation on a proposed European Consumer Credit Directive 25 FEBRUARY 2005 URN 05/834 The DTI drives our ambition of ‘prosperity for all’ by working to create the best environment for business success in the UK. We help people and companies become more productive by promoting enterprise, innovation and creativity. We champion UK business at home and abroad. We invest heavily in world-class science and technology. We protect the rights of working people and consumers. And we stand up for fair and open markets in the UK, Europe and the world. 2 Proposed Consumer Credit Directive - A Consultation Contents Foreword by Minister Section A: General Information Executive Summary How to Respond Additional Copies Confidentiality Help with queries What happens next? Consultation Questions Section B: The Proposal Chapter I: Aim, Definitions and Scope Article 1 – Aim Article 2 – Definitions Article 3 – Scope Chapter II: Information and Practices Preliminary to the Formation of the Agreement Article 4 – Standard Information Article 6 – Pre-contractual Information Article 6 (new) – Information requirements for overdrafts Article 7 (new) – Information requirements for specific agreements Chapter III: Database Access Article 8 – Databases Chapter IV: Formation of Credit and Surety Agreements Article 10 – Contractual Information Article 11 – Right of withdrawal Chapter V: Annual Percentage Rate of Charge and Borrowing Rate Article 12 – Annual percentage rate of charge Article 14 – Borrowing rate Chapter VI: Unfair Terms 3 Article 15 - Unfair Terms Chapter VII: Performance of a Credit Agreement Article 16 – Early Repayment Article 17 – Assignment of Rights Article 18 – Ban on use of bills of exchange and other securities Article 19 – Linked Transactions Chapter VIII: Specific Credit Agreements Article 21 – Credit agreement in the form of an advance on a current account or a debit account Article 22 – Open-end credit agreements Chapter IX: Performance of a Surety Agreement Article 23 – Performance of a surety agreement Chapter X: Non-Performance of a Credit Agreement Article 24 – Default notice and enforceability Article 25 – Overrunning of the total amount of credit and tacit overdraft Chapter XI: Registration, Status and Control of Creditors and Credit Intermediaries Article 28 – Regulation of creditors and credit intermediaries Article 29 – Obligations of credit intermediaries Chapter XII: Final Provisions Article 30 – Total harmonisation and imperative nature of the Directive’s provisions Article 31 – Penalties Article 32 – Out-of-Court redress Article 34 – Existing agreements Section C: Partial Regulatory Impact Assessment Annex: Code of Practice on Consultations Unofficial Consolidated text of the Directive Individuals/ Organisations consulted 4 FOREWORD These days, credit is an integral part of daily life. It gives us the flexibility to manage the ups and downs in our finances. The market has been changing rapidly and the level of borrowing has been rising. In response to these changes, we have introduced a number of reforms to the legislation on consumer credit to ensure that the market is fit for the 21st century. But it is not only the UK market that is changing and expanding. The European Commission has recognised that the 1987 Consumer Credit Directive is out of date, has failed to open up the internal market in consumer credit and is in need of reform. The UK Government supports the creation of a single market in consumer credit. We believe that this would be good for UK business and for consumers, who should benefit from the increased competition. However, we need to ensure that any European Directive does not undermine important consumer protections or stifle innovation. The UK credit market is one of the largest in the EU and offers consumers a range of diverse and tailored credit products. We need to ensure that the industry operates to fair, competitive and transparent standards and that consumers get a competitive deal. We have worked hard to reform the UK credit market to provide the appropriate regulatory framework. The Commission’s latest draft, revised, Directive has made significant steps forward in reflecting the diverse nature of the EU consumer credit market. We welcome the reduction in its scope to allow member states to deal with a number of specific issues on a national level. However, much more work is needed to remove genuine barriers to developing a single market for consumer credit and at the same time maintain the highest levels of consumer protection. This document sets out our position towards the policies presented in the latest draft of the Directive and I would like to invite industry, consumer bodies and regulators to comment on the analysis. Your comments are valuable to us as they will help to further shape our future negotiating position on the emerging new Consumer Credit Directive. Gerry Sutcliffe Parliamentary Under Secretary for State For Employment Relations, Consumer and Postal Services 5 SECTION A: General Information Executive Summary 1. Consumer credit is central to the UK economy. The UK has enjoyed rising prosperity, record employment and low interest rates due to economic stability based on sound fundamentals. As a result the UK has seen an increased demand for consumer credit. Unsurprisingly Britain has the most energetic and competitive consumer credit market in Europe accounting for over 30% of consumer credit in the EU15 in 2002. 2. As the credit market has developed, reforms have become necessary to modernise the current regime for the 21st century. The UK Government has recently updated domestic legislation governing credit advertising, information requirements for agreements and the rules for early settlement of credit agreements. Furthermore, on 16 December 2004 the Government introduced the Consumer Credit Bill into the UK Parliament. The Bill, when passed, will improve consumer rights and redress, improve the regulation of consumer credit businesses and provide for more appropriate regulation of consumer credit agreements. In addition, UK mortgage regulation has been substantially reformed. All these measures are necessary to ensure a competitive, fair and more transparent credit market which is fit for the future. 3. The UK Government agrees that the consumer credit laws governing cross border trade between European Member States are in need of updating and reform. In 2002 the European Commission identified that there had been little growth in cross border credit transactions and that significant barriers remained. These barriers must be tackled in order to develop consumer and business confidence to facilitate access the single market opportunities in this area. 4. On 11 September 2002, the Commission adopted a proposal for a revised Directive for the regulation of consumer credit. The proposed Directive has since undergone significant changes. The European Parliament adopted its First Reading position on 20 April 2004, and since then the Commission has revised its draft proposal to accept a number of the European Parliament’s amendments. The Commission adopted an amended proposal on 28 October 2004. 5. The UK is committed to a Europe that creates business opportunities and enhances consumer protection and choice; a Europe that builds the confidence of consumers to shop across borders; and a Europe where business can transact with certainty. We want to see a competitive, dynamic single consumer credit market that encourages entrepreneurship and growth. To that extent, we support the Commission in its programme to modernise the existing 1987 Consumer Credit Directive. 6 6. We support the Commission’s objectives for: • • • maximum harmonisation for data sharing, pre-contractual and contractual information and calculation of APRs; the licensing requirements; overdrafts to be governed by a light touch regime, which does not go substantially further than current provisions contained in the 1987 Directive. 7. However, we continue to have concerns with the current draft Directive. We believe that some of the proposals place unnecessary burdens on business, reduce consumer protection and do little to create a competitive single market in consumer credit. We believe significant changes are still required to ensure the development of an effective single market in consumer credit, which enables businesses to work with legal certainty and consumers to shop confidently across Europe. 8. Europe contains vastly different credit markets. Member States need to have the flexibility to introduce specific requirements and consumer protections in a number of key areas. Therefore, we support minimum harmonisation in most other parts of the Directive. 9. Furthermore, the UK Government believes that the Commission should make substantial amendments to specific provisions contained in the Directive to ensure an appropriate balance between costs to business and benefits to consumers, including: • • • the removal of all secured lending on property from the Directive; the removal of the duty for lenders to advise consumers of appropriate credit products; credit unions to be excluded from the scope of the Directive or, if included, for the Directive only to set down minimum information requirements; more sophisticated requirements for the advertising provisions; removing the concept of responsible lending but ensuring that there are adequate provisions on pre-contractual and contractual information, advertising and the licensing of lenders; maintaining the UK’s approach to the regulation of joint and several liability. • • • 10. In this consultation paper we set out the UK Government’s current position on the Directive and invite submissions from interested persons and bodies on this position. The conclusions that we reach as a result of 7 this consultation will contribute to the UK Government’s future negotiating position on the Directive. How to Respond 11. When responding please state whether you are responding as an individual or representing the views of an organisation. If responding on behalf of an organisation, please make clear who the organisation represents and, where applicable, how the views of members were assembled. 12. The deadline for responses to the consultation is 22 April 2005. If you want to participate in this consultation, please complete the enclosed consultation response form. An electronic version is also available at http://www.dti.gov.uk/ccp/consultations.htm 13. Your response can be submitted by letter, fax or e-mail to: Charlotte Matthews Department of Trade and Industry Bay 406-412, 1 Victoria Street London, SW1H OET Tel: 0207 215 5131 Fax: 0207 215 6726 Email: charlotte.matthews@dti.gsi.gov.uk 14. A list of those organisations and individuals consulted can be found in Annex 3. We would welcome suggestions of others who may wish to be involved in this consultation process. Additional Copies 15. Further printed copies of this document are available from: DTI Publications Orderline ADMAIL 528 London SW1W 8YT Tel: 0845 015 0010 Fax: 0845 015 0020 Minicom: 0845 015 0030 www.dti.gov.uk/publications An electronic version can be found at: http://www.dti.gov.uk/ccp/consultations.htm Confidentiality 16. Your response may be made public by the DTI. If you do not want all or part of your response or name made public, please state this clearly in the 8 consultation response form. Any confidentiality disclaimer that may be generated by your organisation's IT system or included as a general statement in your fax cover sheet will be taken to apply only to information in your response for which confidentiality has been explicitly requested in your response. 17. We will handle any personal data you provide appropriately and in accordance with the Data Protection Act 1998. Help with queries 18. Questions about the policy issues raised in the document can be addressed to: Charlotte Matthews (see para 13 above for contact details) 19. If you have comments or complaints about the way this consultation has been conducted, these should be addressed to: Nick Van Benschoten DTI Consultation Co-ordinator 1 Victoria Street, London SW1H 0ET Tel 0207 215 6206 Email: nick.vanbenschoten@dti.gsi.gov.uk What happens next? 20. The UK Government will use the responses received to help form its negotiating position when discussions on the draft Directive begin. The text of the proposed Directive can undergo major changes during negotiations and the timetable and progress of discussion can change very quickly. 21. Decisions taken in light of the consultation will be publicised along with a summary of the responses received. 22. Stakeholders will be able to follow developments on this Directive following the consultation, on the DTI website at: http://www.dti.gov.uk/ccp/consultations.htm 23. As negotiations on the Directive progress, it may be necessary to hold a further consultation. This may be done via a similarly wide exercise or using a more targeted approach. 9 Consultation Questions Chapter 1: Aim, Definitions and Scope Q1: Do you have any concerns arising from any of the other definitions in this Article? Q2: What do you think is the appropriate level of harmonisation for the Directive? Why? Q3: If you support a targeted harmonisation approach which areas do you think should be subject to maximum harmonisation, which minimum? Q4: Do you agree with the proposed UK Government position with regard to the various scope and specific requirement issues - if not, what would you amend and why? Chapter 2: Information and Practices Preliminary to the Formation of the Agreement Q5: Will the article, as drafted, assist the development of a cross-border market and consumer protection for credit by making credit advertisements more transparent? Q6: Do you think that a principled approach based on mutual recognition would be appropriate for advertising? If so, what key information do you think should be included in all credit advertising? Q7: Do you agree with the UK position on contractual information? Q8: Do you agree with the position on pre-contractual information and in particular the reference to “in good time"? Q9: Do you agree with our position on a duty to advise? Q10: Do the extra requirements of the Article cause lenders and borrowers any difficulties? Q11: Do you agree with the UK approach to Credit Unions? Q12: Do you have any comments on how the proposal contained in Article 7 can be amended so that the consumer clearly benefits and is not exposed to exploitation? 10 Chapter 3: Database Access Q13: Do you agree with the UK position on Databases? Q14: We would like to know of any concerns you may have arising out of this Article, including any concerns about the costs of implementation. Chapter 4: Formation and Surety Agreements Q15: Would lenders have systems difficulties in providing the personalised information currently required by the draft Directive? Q16: Please provide any specific comments you might have on these extra items of information that the Directive proposes should be included in credit agreements. Q17: Do you agree that the UK should argue for the inclusion of all of the above information requirements in the Directive? Q18: Do you agree with the UK position on right of withdrawal? Chapter 5: Annual Percentage Rate of Charge and Borrowing Rate Q19: Do you agree with our policy to seek maximum harmonisation on the subject of APR on the basis of the policy suggestions outlined? Q20: Given that we aim to retain the current provisions relating to the calculation of APRs for HP transactions, are there any difficulties associated with this proposal and if so what are they? Q21: Do you agree with our policy to resist the requirement that the new APR and amortisation table must be given when borrowing rates are varied? Chapter 6: Unfair Terms Q22: Do you support the inclusion of these terms in the Unfair Contract Terms legislation? If so, why? Chapter 7: Performance of a Credit Agreement Q23: Would you prefer to see maximum or minimum harmonisation in this area? Why? Q24: Do you agree with our position on assignments of rights? 11 Q25: Do you support our policy to maintain current UK law and retain the provisions contained in the 1987 Directive? Q26: Would you support our approach of maintaining joint and several liability as set out in the UK? Q27: Do you agree with a minimum harmonisation approach in this area? Chapter 8: Specific Credit Agreements Q28: Is there any need for this Article? If so, in what circumstances should it be retained? Chapter 9: Performance of a Surety Agreement Q29: In view of the differences between the Article and UK law do you agree we should seek minimum harmonisation? Chapter 10: Non-Performance of a Credit Agreement Q30: Are there any problems with applying this requirement to running account credit? Q31: Do you agree that a minimum harmonisation approach to default and enforceability is appropriate? Q32: Do you think that this Article provides adequate regulation for unauthorised overdrafts? Chapter 11: Registration, Status and Control of Creditors and Credit Intermediaries Q33: Do you think that this Article is strong enough to protect consumers in an open internal market? Or do you think that such light requirements will upset the balance of competition and level of consumer protection? Q34: Would it be more appropriate to introduce a passporting system similar to the banking Directives, where creditors or intermediaries would have to fulfil passporting provisions demonstrating that they are ‘fit’ before they lend cross-border? 12 Q35: Is there any reason why credit intermediaries should not be required to divulge whether they are an independent broker, or work with one or more clients? Q36: Would you agree that the instances when a credit intermediary can charge a fee should be limited? If so, do you agree with the conditions above? Section C: Regulatory Impact Assessment Q37: Do you agree with the assumptions, figures and impact assessments made in this RIA - if not, please provide as much supporting evidence as possible. 13 SECTION B: THE PROPOSAL Background and Context to the Consumer Credit Directive proposal 24. The Consumer Credit Directive 87/102/EEC was adopted in 1987 and, although amended twice since then remains substantially the same. The Commission identified that there had been little growth in cross border transactions. As a consequence it decided to review the Directive to ensure that its provisions would allow consumers and companies to take full advantage of a single consumer credit market. After consultations in 2001, the Commission concluded that the Directive required major changes to reflect modern credit practices and products and to encourage the growth of a single market. On 11 September 2002, the Commission adopted a proposal to replace the existing Consumer Credit Directive. 25. The Commission's initial draft was heavily criticised by Member States and the European Parliament because of the burdens it placed on business. It was far reaching in scope i.e. it covered secured lending which is not for the purchase or transformation of property (i.e. equity release) and unsecured lending; credit unions and overdrafts were to be treated the same way as regular credit agreements; proposed the setting up of a central European Database; required a Total Lending Rate to be calculated and stated on each credit agreement; and introduced very prescriptive responsible lending requirements. Furthermore, the proposal was subject to maximum harmonisation and would have left no room for Member States to have made national adjustments according to the specific needs of their consumer credit markets. 26. The European Parliament adopted its First Reading position on 20 April 2004. The Parliament substantially altered the level of harmonisation, scope and provisions of the proposed Directive. 27. The Commission revised its proposal to accept a number of the Parliament’s amendments, and adopted an amended proposal on 28 October 2004. The amended proposal is in the form of comments on the Parliamentary amendments rather than a revised text of the Directive. It is ambiguous and requires clarification. On the basis of the Commission’s proposal we have put together an unofficial consolidated version (Annex 1). This text is only intended as a rough guide to the revised proposal for the reader and should not be regarded as an official Commission text or necessarily reflecting every change that is intended. The aim of this consultation is to develop a coherent UK negotiating position on the proposed Consumer Credit Directive, and therefore we do not seek specific views on the draft provided. Accordingly, the reader does not need to consider the detail of the unofficial draft to respond to this consultation. 14 28. It is expected that either the Commission will issue a formal consolidated text or that a revised text will be issued by the Luxembourg Presidency as a basis for re-starting negotiations in Council. 29. The proposed Consumer Credit Directive has to be evaluated against the most recent UK Consumer Credit Review and subsequent reform programme. The DTI launched a Consumer Credit Review in 2001 and published a Consumer Credit White Paper in December 2003 setting out the Government's reform programme to ensure a transparent, fair and competitive consumer credit market for the 21st Century. In June 2004 the Government laid four statutory instruments before Parliament reforming existing UK consumer credit regulation: The Consumer Credit (Agreements Amendment) Regulations 2004, The Consumer Credit (Advertising) Regulations 2004, The Consumer Credit (Disclosure of Information) Regulations 2004, and the Consumer Credit (Early Settlement) Regulations 2004. The advertising regulations came into force on 31 October 2004, the early settlement, disclosure of information and agreement regulations will come into force on 31 May 2005. 30. In December 2004 the Government also introduced the Consumer Credit Bill into Parliament which will reform the Consumer Credit Act 1974 to improve consumer rights and redress by introducing a new Alternative Dispute Resolution mechanism and a new unfairness test for credit agreements, to improve regulation by reforming the consumer credit licensing regime, and to ensure appropriate regulations by abolishing the existing statutory financial limit for credit agreements. 15 CHAPTER 1: AIM, DEFINITIONS AND SCOPE Article 1: Aim 31. The aim of the Directive is to harmonise the laws, regulations and administrative procedures of the Member States concerning agreements covering credit granted to consumers and surety agreements entered into by consumers. Article 2: Definitions 32. We are concerned about the definition of “credit intermediaries” as it is currently wide enough to include groups not caught by the UK CCA, such as local authorities and affinity groups. 33. We deal with our concerns about the definitions of "linked credit agreements" and “Total Cost of Credit” later in this Consultation Document - see the sections dealing with Articles 12 and 19 below. 34. The drafting of the definition of “credit agreement” requires further work to ensure a coherent definition of what constitutes credit. For example, it fails to distinguish pay-as-you-go arrangements, which do not involve the grant of credit, from payments under which credit is repayable by instalments. Q1: Do you have any concerns arising from any of the other definitions in this Article? Article 3: Scope 35. The scope of the Directive is potentially wide. It applies to credit agreements and surety agreements entered into by consumers. Instead of defining the parameters of the Directive, Article 3 sets out a number of exclusions, which seek to define its scope. The Directive excludes from its scope: • Credit agreements that are (a) for the purpose of the purchase or renovation of property and (b) secured by mortgage or other security; Hiring agreements, except where they provide for the title to pass to the hirer eventually; Leasing agreements, which do not create any obligation to purchase the object of the agreement; • • 16 • Credit agreements under the terms of which the consumer is required to repay the credit in a single payment within a period not exceeding three months, without the payment of interest or any other charges; Credit agreements which are granted by the creditor outside the sphere of any commercial or professional activity or are granted by an employer to his employees as a secondary activity at annual percentage rates of charge lower than those prevailing on the market or which are not offered to the public generally; Credit agreements concluded with investment firms within the meaning of Article 1 (2) of Council Directive 93/22/EEC 1 for the purposes of allowing an investor to carry out a transaction relating to one or more of the instruments listed in Section B of the Annex to that Directive, where the firm granting the credit is involved in such transaction 2 . Surety agreements guaranteeing business loans; Credit agreements which are the outcome of a court settlement; Credit agreements whose conclusion is accompanied by the consumer depositing a security in the creditor's safe keeping, where the surety deposited with the creditor is sufficient in itself to pay off the loan; Credit agreements over € 100,000; Credit agreements under which the consumer is required to repay the credit by a maximum number of four payments within a period not exceeding 12 months; and Start-up or personal development loans granted by public institutions or institutions officially authorised to do so. • • • • • • • • The following credit agreements are excluded from the scope of the Directive except for certain specified provisions: • Article 6 (new) and Article 21 apply to credit agreements on the basis of which a credit or financial institution granted credit in the form of advances on current accounts or debit accounts, where the total amount has to be repaid within three months or on demand; Article 7 (new) applies to: • 1 2 OJ L 141, 11.6.1993, p.27. OJ L 141, 11.6.1993, p.27. 17 • • Smaller loans (i.e. of a value less than €300); Loans granted to a restricted public, at a lower interest rate than usually proposed on the market or free of interest, and when the creditor is fulfilling a statutory duty with a general interest purpose; Loans granted by certain non-profit associations such as genuine credit unions; and Credit agreements aiming at refinancing the existing debts of a consumer in order to avoid legal proceedings and where the terms do not have the consequence of putting the consumer in a worse situation than before the new agreement. • • 36. The proposed scope of the Directive and the exclusions listed above present a number of specific problems and questions for the UK which are dealt with in detail below. Level of Harmonisation 37. The Commission’s proposal is to move from the “minimum harmonisation” approach of the 1987 Directive to “total” harmonisation. The revised proposal provides that Member States are not, except where specifically provided in the Directive, to ‘introduce provisions other than those laid down in the Directive’ (Article 30(1)). A possible exception appears to be Article 19 (linked transactions). This means that Member States may not derogate from the provisions set out in the Directive when regulating consumer credit and surety activities that fall within the scope of the Directive. There are some areas of doubt concerning this policy especially because Article 3 is drafted in such a way that it is unclear exactly what the extent of the scope covered by the proposal is, and from which Member State legislation is excluded. The Commission rejected a set of European Parliament amendments that sought to base the new proposals largely on the principle of minimum harmonisation, allowing Member States to introduce or retain further measures at national level in addition to the EU rules. The Commission has argued that maintaining differences other than those permitted between national consumer protection laws would undermine the establishment of a single market for consumer credit in Europe. 38. The UK will support the Commission's effort to create a single market in consumer credit. However, the UK does not support moves to reduce the level of protection for British consumers, which the UK Government is working to improve through the Consumer Credit Bill. The UK Government is pursuing domestic legislative reform due to the 18 overwhelming demand from both industry and consumer representatives for reform, and because we are not prepared to let current levels of consumer detriment persist. 39. The UK consumer credit market is very competitive and offers consumers a wide range of products tailored to the needs of consumers. This range includes a variety of products suitable for consumers with low incomes, limited savings or some form of credit impairment (i.e. so-called “subprime” or “non-status” consumers). 40. A larger market and increased competition from a wide variety of credit providers across Europe would, in turn, generate economies of scale for credit providers, lower costs, foster innovation and competition and consequently lower prices for consumers across the single European market. UK-based credit providers would be able to capitalise on their long experience in offering a wide variety of consumer credit products to offer new services and products in many Member States, once the single market is achieved. 41. There are a number of provisions, for example the duty to advise, in the Commission’s proposed draft that would be costly for UK credit businesses to implement and would create a significant increase in ongoing overhead costs. These extra costs, which would flow onto consumers, could be more significant than the benefits derived from an increase in cross border trade generated in the short–to-medium term 3 . 42. In addition Member States have significantly different types of consumer protection regulation reflecting the nature, diversity and maturity of different national consumer credit markets. 43. It is the view of the UK Government that a rapid move towards a fully harmonised ‘one size fits all’ credit market would lead to the loss of important national consumer protections, particularly in relation to those markets with a high degree of complexity and innovation, including that of the UK. This could serve to reduce consumer protection in the UK and harm the further development of the highly competitive UK market. 44. With this in mind, we have argued for full harmonisation in areas where it is necessary to remove some genuine barriers to cross-border lending, such as access to data, standardised method of calculating APRs and information requirements. However, in areas of consumer protection, we have argued that minimum harmonisation be set at a high level which would allow for national regulation to deal with market issues specific to different Member States markets. In effect, we have supported, and will 3 See Regulatory Impact Assessment at Section D of this Consultation Document. 19 continue to support, a mixed and proportionate approach harmonisation rather than blanket “maximum harmonisation”. to 45. We remain extremely concerned that the Commission is continuing to advocate a "one size fits all" regime for what is a diverse set of credit markets. The UK Government's position is that the regulation of consumer credit must be proportionate and this can better be delivered by targeted, rather than maximum, harmonisation. Q2: What do you think is the appropriate level of harmonisation for the Directive? Why? Q3: If you support a targeted harmonisation approach, which areas do you think should be subject to maximum harmonisation, which minimum? Secured Lending 46. We believe that the Commission has not fully taken into account its own initiative to examine the obstacles to the development of a single mortgage market - the Mortgage Forum. This is demonstrated by the fact that it has included all secured lending except where the loan is for property purchase or transformation in the scope of the draft Directive 47. The UK Government believes that the Directive should not apply to mortgages or other forms of lending secured on property. Such loans differ from other forms of consumer credit in their complexity and in their lending process. The inclusion of some property mortgages within the scope of the draft Directive will impose standards that are inappropriate and disproportionate for other forms of consumer credit. 48. For example, loans secured on property feature very different risks to other forms of consumer credit. These risks, which the proposal does little to address, include: • • • exposure to fluctuations in the property market – borrowers being trapped through negative equity etc; repossession – the risk of the home being lost due to changes in the borrower’s circumstances and hence their ability to repay; exposure to investment risk – the shortfall on an interest-only mortgage where the endowment product under-performs is one example, another is the close linkage between certain types of equity release products and investments intended to provide an income or meet care costs etc; and 20 • the purchase of unsuitable or expensive insurances – there are a range of insurances which may be required or which might be tied with the loan itself. 49. Including some secured loans in the Directive would not, in our view, lead to the development of a single market in these products. There are numerous procedural, cultural and structural obstacles to be overcome – as recognised in the very recent report of the Mortgage Forum Group. The Mortgage Forum Group report provides a good basis for developing a comprehensive strategy to address single market obstacles. In contrast, including some mortgages in the Directive offers only the possibility of piecemeal changes that will do little to promote cross-border mortgage sales. 50. It should also be remembered that excluding mortgages from the scope of the Directive does nothing to weaken consumer protection. All Member States will be free to retain or adopt appropriate measures at national level. 51. There are also practical reasons why the UK Government considers it undesirable for the Directive to apply to secured lending. The Directive adopts a subjective approach that requires a mortgage lender to ascertain the purpose of the loan in each case. This may well be problematic. The UK has an active mortgage market with consumers changing lenders without moving house, for example, to obtain a better interest rate. In such cases lenders usually do not ask the purpose of the loan. Typically, there may well be elements both of refurbishment and equity withdrawal. 52. A 'purpose' test was rejected as an option following industry responses to HM Treasury consultation on the approach to regulating mortgages. This was principally because of the uncertainty inherent in a subjective test based on purpose, and also because of the additional burdens it would impose on lenders in order to ascertain and verify the purpose of the loan. 53. As well as the problem of identifying the loan purpose, a 'purpose' test would mean that all mortgage lenders face the prospect of having some loans within the scope of the Directive and others which are not. This would mean that firms would need two systems to handle their loan portfolios. Apart from the costs inherent in setting up additional systems, their complexity would be increased by the need to share information between them. 54. A 'purpose' test would also mean consumers enjoying different levels of protection for what would otherwise be identical loans simply because the intended use of the funds was different. As the risks will be the same regardless of the purpose of the loan, consumers are likely to find these differing standards of protection confusing. 21 55. To summarise, we believe that real property mortgages should be dealt with in a coherent way and not partially regulated by the Directive. When compared with the UK’s recently introduced system of mortgage regulation by the Financial Services Authority (which followed market analysis, consumer research, consultation and a full cost benefit analysis), we believe that the Commission’s proposed approach could give rise to at least four types of adverse effects: • Type 1 – the costs to firms arising from changes in rules following from the Directive, including those resulting from new requirements or where standards exceed those in the current UK regime, without any evidence that the measures are a cost-effective means of delivering the intended benefit; Type 2 – if there is a maximum harmonisation approach, a reduction in consumer protection where the Directive’s standards are lower than the FSA rules; Type 3 - wasted costs where firms have met FSA standards which are reduced or removed by the draft Directive; and Type 4 - an increase in the number of firms requiring regulation, with the additional requirement for compliance costs without any assessment about the relevant benefits or the risks presented by them. • • • 56. These concerns are expanded upon in the accompanying RIA. The adverse effects are greatest if the Directive is a maximum harmonisation measure. However, a number of these adverse effects (especially those in Types 1 & 4) will remain were mortgages to be included in a minimum harmonisation Directive. Hire Purchase 57. The exclusions from the scope of the Directive for hiring and leasing are ambiguous. It is unclear whether only those agreements which contain an obligation to purchase (conditional sale) or if those agreements which provide the option for the title to pass to the hirer at the end of the agreement (Hire Purchase) are brought into the scope of the Directive. 58. Provided certain issues regarding the right of withdrawal are satisfactorily dealt with, the UK Government believes that the Directive should cover all Hire Purchase and conditional sale agreements, as both of these types of agreement are regarded by consumers as credit, and as a method by which goods are purchased. When entering into such agreements consumers commit to long-term financial obligations, which should be regulated. For pure hire agreements with no purchase option, the current regime as laid down in the Consumer Credit Act 1974 is less rigorous than for Hire Purchase and other credit and we would prefer to maintain this 22 distinction reserving the right to regulate hire agreements separately in accordance with current consumer legislation. Loans above €100,000 59. The Consumer Credit Bill will abolish the existing financial limit of £25,000 (above which credit agreements are not presently regulated) to ensure that all consumer credit is regulated, with some limited exceptions. 4 €100,000 (about £69,000 at current exchange rates) may represent a high threshold today, but a fixed limit of this sort is subject to exchange rate fluctuations, inflation and trends in debt consolidation, which mean that the value of such loans is increasing. The UK Government’s position is that, regardless of the value of a loan, a transaction for a purely consumer purpose should be treated in the same manner as any other consumer transaction. If a threshold were to be adopted, it would need to be able to be altered in future, without the usual complications inherent in updating European legislation. 60. We have therefore argued for the removal of the financial limit with some exceptions. However, if credit agreements above €100,000 were excluded from the scope of the Directive then this would still enable Member States to continue to regulate such loans through their domestic regimes. Start up or personal development loans 61. It is not clear from the Amended Proposal what the exemption for “…personal development loans granted by public institutions or institutions officially authorised to do so” covers. This may cover student loans but the term “personal development” is ambiguous. Student loans are also covered by a partial exemption in Article 3.4. The Government is seeking an explicit and unambiguous exemption for public loans for vocational training and education, as set out below in Chapter II. Partial exclusions 62. The draft Directive seeks to reduce the regulatory burden in a number of areas by introducing a ‘light touch’ regime and exclusion from coverage. Articles 6 (new) and 21 cover overdrafts, and Article 7 (new) cover smaller loans, student loans, loans granted by credit unions and agreements aiming at refinancing existing debts of a consumer. Otherwise, the draft Directive will not apply to these types of loans. 63. As drafted, the Commission’s Proposal does not make clear whether credit agreements subject to a ‘light touch regime’ are inside the co-ordinated 4 The exceptions are: credit agreements regulated by the FSA under FSMA, credit agreements made for a business purpose (unless the credit is for less than £25,000 and the debtor falls within the definition of “individual” in the UK CCA); and agreements entered into by persons wishing to seek an exemption on the basis that they are a “high net worth” individual as defined. 23 field of the Directive and thus whether Member States may go further than the provisions of the Directive, or not. We will be seeking clarification as to the effect of these partial inclusions, but our view on whether or not we would be satisfied with the provisions as set out in the Directive is explained below. Overdrafts 64. We support a ‘light touch’ regime for overdrafts. The detailed information requirements to be applied to overdrafts are dealt with in chapter II. Loans below €300 65. The Directive seeks to reduce the regulatory burden on loans below €300 (approx. £220) by proposing specific information requirements for such credit agreements as set out in Article 7 (new). 66. The UK position has been to resist a €300 limit. The Consumer Credit Act 1974 regulates loans below this level, but provides for specific exceptions from obligations for loans of less than £50 (called “small agreements”). We believe that the proposed lower limit is too high. A €300 limit would potentially exclude a large number of credit agreements aimed at the “subprime” or “non-status” market where consumers seek loans for small amounts for short periods, for example home credit, catalogue and mail order lending. We will seek clarification on our ability to fully regulate lending that is subject to partial inclusion. 67. We believe that consumers in this part of the market, who are often vulnerable, require protection. Previous published reports and feedback from financial advisors indicate that consumers requiring lower-value loans are most vulnerable and least likely to seek independent financial advice. Simplified information requirements alone will not provide sufficient consumer protection. 68. Although we could accept such a lower limit for the purposes of the Directive and will continue to regulate such loans through our domestic regime, we would prefer to see UK consumers equally protected by all lenders in the EU and so would prefer to see the lower limit reduced in the Directive. This would also avoid the necessity for dual schemes of regulation at the small loan end of the market. 69. The detailed provision applying to the specific credit agreements covered by this partial inclusion are dealt with in Chapter II. Q4: Do you agree with the proposed UK Government position with regard to the various scope and specific requirement issues - if not, what would you amend and why? 24 CHAPTER II: INFORMATION AND PRACTICES PRELIMINARY TO THE FORMATION OF THE AGREEMENT Article 4: Standard Information (advertising concerning credit agreements) 70. The provisions of the Article are without prejudice to the Unfair Commercial Practices Directive. 71. The Directive on Unfair Commercial Practices was proposed by the European Commission on 18 June 2003. The Directive is now at 2nd reading stage in the European Parliament following agreement on a Council common position on 15 November 2004. Final adoption could be reached by April 2005. Member States will then have 2 years to transpose it into their domestic law. Further details and background can be found at http://www.dti.gov.uk/ccp/topics1/unfair.htm. The Directive addresses commercial practices which unfairly influence consumers' transactional decisions in relation to goods and services including financial services. The Unfair Commercial Practices Directive should complement the rules proposed in the Consumer Credit Directive and provide additional protection in respect of marketing and sales and after-sales practices, where the Consumer Credit Directive is silent 72. The Article proposes that any advertisements concerning credit agreements shall include standard information set out in order as below, through the use of a representative example: • • • • • the total amount of credit; the APR; the duration of the credit agreement; the number and amount of monthly repayments; and any kind of fees in connection with the credit which are known to the creditor. 73. The key policy described in the DTI's Consumer Credit White Paper 5 , which underpins the Consumer Credit (Advertising) Regulations 2004, was that regulation should ensure greater consistency and transparency in credit advertising. Our view is that some of the proposals included in Article 4 do not aid transparency. 74. Requiring standard information to appear in all credit advertising will hamper lenders attempting to build their brand in new markets. Simple advertisements that inform consumers about the existence of products or the lender’s presence in the market will be unduly complex. We consider that the UK’s approach to requiring pre-contract information to be 5 Issued in December 2003 25 supplied before an agreement is made, and prescribing the form and the content of agreements, ensures that consumers receive necessary information at the appropriate time before the contract is made. This also avoids the need for the inclusion of a lot of technical information in basic brand building advertisements. 75. Representative examples contained in advertisements are not necessarily helpful and our research has shown that consumers do not read the examples. There are of course obvious difficulties associated with the assumptions that could be factored into the representative examples for advertisements for running account credit products. Our view is that the most efficient form of comparing cost of credit is to adopt the 66%-rule for APRs. The confusion over the assumptions that are factored into the calculation of the APR is discussed elsewhere in this paper. 76. In the UK, specific assumptions are provided for in calculating the APR to be shown in credit advertising. The APR for running account credit is based on the “go to” rate and the assumed period of credit for an openended credit agreement is only one year. The calculation for APR suggested in Article 12 differs in that on one interpretation the APR would be a blended rate including the “go to” rate and any introductory offers. As discussed in the Section referring to Annual Percentage Rates under Article 12 we do not support a blended rate because we consider that lenders could exploit the proposal by offering cleverly timed promotional rates which would confuse consumers. We prefer the assumptions used for calculating APRs as laid down in the recent Consumer Credit (Advertisements) and Consumer Credit (Agreements) (Amendment) Regulations 2004. It appears that the Commission's proposal does not contemplate advertisements for open-ended running account credit where the credit limit has not been set and the monthly repayments may be different each month. 77. In view of our concern that the proposals do not aid transparency and will make some credit advertisements unduly complicated and difficult to understand, it has been suggested that certain minimum requirements should be set out in the Directive and the principle of mutual recognition introduced for advertisements. 78. The key information that is used in the UK to compare the cost of similar products is the reference to the Typical APR in most credit advertisements. It may therefore be necessary to concede that all credit advertisements will have to contain an APR and ideally a Typical APR based on the assumptions currently used in the UK and discussed above. 79. The implications of introducing minimum harmonisation and subjecting it to mutual recognition would be that detailed rules in Member States would differ. This would mean that all consumer credit advertisements 26 throughout the EU would not be harmonised, which may in turn confuse consumers and would not help to facilitate a cross border market. Q5: Will the article, as drafted assist the development of a crossborder market and consumer protection for credit by making credit advertisements more transparent? Q6: Do you think that a principled approach based on mutual recognition would be appropriate for advertising? If so, what key information do you think should be included in all credit advertising? Article 6: Pre-Contractual Information 80. This Article covers three separate and distinct areas. The first is the concept of “responsible lending”. The second deals with pre-contractual information that is to be provided to consumers before they conclude their credit agreement. The third is the introduction of a duty for lenders and intermediaries to advise consumers as to which of the credit products they offer is the most appropriate to the consumer's needs. Responsible Lending 81. The Directive describes responsible lending as "including" the requirement for the creditor, and, where applicable, the credit intermediary, to comply with the following obligations: • • To provide the pre-contractual information set out below in good time before the consumer is bound by the agreement; To assess the consumer’s creditworthiness on the basis of information provided by the consumer and, where appropriate, on the basis of a consultation of the relevant database; and If the consumer's total amount of credit is to be “significantly” increased during the agreement, to update the financial information at the creditor's disposal and to assess the consumer’s creditworthiness beforehand. • 82. This Article adds very little to the obligations already contained in previous proposals to provide pre-contractual information and assess creditworthiness. The only new obligation that is introduced is the obligation for a lender to update the financial information at his disposal and to assess the consumer’s creditworthiness before any "significant" increase in the total amount of credit. There is no indication as to what constitutes a "significant" increase in credit, although we know that most UK lenders would undertake a further credit check in such circumstances. 27 No additional sanctions or overreaching penalties for failing to adhere to the principle are provided for. 83. The UK Government has considered the introduction of a principle of “responsible lending” as part of its deliberations in preparing the Consumer Credit Bill but has decided not to include such a principle. 84. The UK Government's first and principal objection to such an obligation is based on the fact that, ultimately, it is the creditor’s decision as to how, and how best, to assess the credit-worthiness of the consumer. Imposing specific requirements of a limited nature could encourage the following results, including: • the creditor adopts the attitude that compliance with the very limited specified requirements is sufficient to discharge the duty to lend responsibly; in complying with the specified requirements, the creditor does not undertake inquiries appropriate to the circumstances of the consumer and so, effectively, lends irresponsibly. • 85. There is a real danger, if the Directive takes a maximum harmonisation approach to this issue, that the above scenarios might occur. We accept there are rules laid down for mortgage providers to require lenders to be able to ensure that account was taken of the consumer’s ability to repay. However the ways in which lenders currently assess consumers for the purpose of lending money are manifold and reflect the diversity of products and consumers’ personal circumstances present in the UK market. For example we accept that it is not always appropriate to carry out a credit reference searches for home credit transactions for small amounts. We believe that this should continue. 86. The second reason why the UK Government rejects the principle of "responsible lending" as set out in the Directive is that to date, it has not seen any clear definition of scope and nature of this general concept. This is essential to ensure certainty for both consumers and industry alike and thereby avoid a spiral of costly litigation. The description of the principle of responsible lending in the Commission's proposal appears to have been drafted more as a minimum standard than a clear definition, despite being part of a maximum harmonisation Directive. The definition of "responsible lending" in the Commission proposal is stated to "include" giving pre-contractual information and checking creditworthiness. The use of the word "includes" indicates that the Article envisages there being other conduct that may be indicative of responsible lending, but this other conduct is not described. 87. It is not clear whether this is intended to provide scope for Member States to prescribe additional criteria of “responsible lending” or to permit lenders 28 to take other matters into consideration. If it is the latter, then our concern is that the provision encourages a culture of minimal compliance among lenders, without the additional obligation on lenders to take account of the personal circumstances of the consumer. 88. The Consumer Credit Act 1974, at present and more so once amended along with the statutory instruments on advertising, pre-contractual information and the form and content of credit agreements, imposes specific requirements on lenders in relation to the advertising, sale, making and administration of credit agreements. In addition to this, the Consumer Credit Bill proposes to introduce a general principle permitting consumers to challenge unfair relationships between debtors and creditors. This effectively introduces an obligation for lenders to ensure that their lending is not unfair. The UK Government has adopted this approach rather than using a general standard of "responsible lending". It is the UK Government's view that an obligation to comply with pre-contractual information requirements combined with an obligation to ensure that all lending is not unfair and a strengthened licensing regime will be as effective as introducing a standard of "responsible lending" without the risks of minimal compliance and the uncertainty associated with the introduction of a general standard of "responsible lending". Q7: Do you agree with the UK position on contractual information? Pre-Contractual Information 89. Under UK law, creditors are already required to disclose specific precontractual information to consumers. The information that must be given differs depending upon whether the credit agreement is to be concluded face-to-face or at a distance. If the credit agreement is to be concluded face-to-face, from 31 May 2005 6 , full details of the information to be contained in the credit agreement must be given to the consumer in a separate document before the agreement is made. If the agreement is to be concluded at a distance, only certain summary information must be given and it need not be given in a separate document 7 . UK law imposes more specific pre-contractual information requirements for credit agreements that are concluded face-to-face than for agreements concluded at a distance as consumers who conclude their agreements face-to-face have no statutory right to cancel the agreement. 90. In the Directive 8 , the right to cancel for a period after the conclusion of the credit agreement is extended to all credit agreements and so the Directive 6 7 Consumer Credit (Disclosure of Information) Regulations 2004 UK Financial Services (Distance Marketing) Regulations 2004 implementing Directive 2002/65/EC concerning the Distance Marketing of Consumer Financial Services 8 Article 11 29 assumes that the pre-contractual information will be given in this context. The Directive requires certain information to be given "in good time before the consumer is bound by a credit agreement or any offer". The information required to be given at the pre-contract stage largely mirrors the information required to be given in the credit agreement itself, except that the following contractual information need not be given at the precontractual stage under the provisions in the Directive: • • • The goods or services being financed; Description of security; and Detailed amortisation table (although a repayment table should be given where possible). 91. The information that is required to be given also repeats the information required to be given under the existing European Directive on Distance Marketing of Consumer Financial Services with some additional requirements specific to credit agreements. The Directive states that the requirement to give pre-contractual information can be satisfied by supplying a copy of the credit agreement in advance. Effectively, therefore, for credit agreements concluded at a distance, the precontractual information requirements in the Directive could be satisfied by sending the consumer a copy of the unexecuted agreement as is currently the case under UK law. 92. For credit agreements concluded face-to-face, full details of the credit agreement must be given "in good time before the consumer is bound" by the credit agreement or the offer. The information must be given on paper or on another durable medium. This extends current UK law 9 in that the requirement is that the information must be provided “in good time” and not simply “before the agreement is made” which would arguably mean that the consumer would get the pre-contractual information earlier. In our view this is more beneficial for consumers. Introducing a principle that a consumer must have a chance to consider the credit terms in advance of signing the agreement is a step forwards for consumers. 93. In the case of pre-contractual information given over the telephone, the Directive cross-refers to the Distance Marketing Directive and adds a requirement to give repayment information, the total amount of credit, the APR, the total cost of credit and a representative example. We welcome less onerous requirements for telephone communications. Of course the consumer remains protected because the right of withdrawal commences only after the full terms of the contract have been advertised in durable medium. 94. Where credit agreements provide for credit that is repayable through insurance or other agreements and not through the usual repayment 9 s55 Consumer Credit Act 1974 30 method, the Directive states that there must be a clear and concise statement that repayment is not guaranteed (unless a guarantee is given). In our view this is a sensible requirement. Q8: Do you agree with the position on pre-contractual information and in particular the reference to in "good time"? Lender’s Duty to Establish the Most Appropriate Credit Product 95. Paragraph 4 of the Article requires that a creditor or intermediary “shall seek to establish among the credit agreements they usually offer or arrange, the most appropriate type and total amount of credit taking into account the financial situation of the consumer, the advantages and disadvantages associated with the product proposed, and the purpose of the credit.” 96. The UK Government welcomes the sentiment behind the proposed Article, which is to minimise over-indebtedness. This is one of the key drivers behind the UK Government’s approach to consumer credit reform, which seeks to combine legislative change with institutional reform to improve the provision of services to consumers and improve industry practices. We can contribute to social justice and prosperity for all by tackling overindebtedness and improving financial inclusion. 97. However, our policy is to resist the imposition of a requirement of this sort on lenders and intermediaries. The UK Government has, through a crossgovernment Ministerial Committee, analysed carefully the causes of overindebtedness 10 and has found that it is usually caused by an inability to cope financially with the effects of a major life event or change in circumstances, such as losing a job, separating from a partner or having children. It is true that one, often important, reason why consumers cannot cope is a lack of understanding about financial products. However, lack of financial understanding is only one of a number of reasons why a consumer may become over-indebted. In our view it is disproportionate for lenders and, in particular, for intermediaries, to take on the entire responsibility of ensuring that consumers make the right choices about credit and an abdication of the personal responsibility of consumers to manage their affairs in the way that they think best suits them. 98. Even if one accepted the underlying premise of the proposed Article and advocated an interventionist approach to this issue, which the UK Government does not, the Article does not appear to achieve its purpose. This is because it only requires lenders to consider which of its own various products are most suitable. This favours the single product lender or tied broker, who, for example, only offers a single type of loan, and 10 see chapter 5, DTI White Paper on the Consumer Credit Market in the 21st Century, December 2003 31 penalises those lenders who would have to consider the whole spectrum of products on offer. This would work against ensuring an open and competitive market. It also ignores the possibility that none of the products that the lenders offer would be suitable for the consumer and does not provide that the lender must inform the consumer of this. Further, the Article does not take into account the fact that unrestricted-use running account credit (usually as a credit card) is an extremely popular form of credit in the UK. In order to comply with this Article, credit card lenders would have to start asking consumers why they wanted the credit card, which, in our view, contradicts the nature of unrestricted-use credit. 99. We are also concerned that the obligation in this Article will cause the application process for all credit to become a great deal longer and more laborious discouraging consumers from consolidating debt, shopping around and moving between credit products. The Article appears to only envisage credit sought face-to-face in branches. In fact, the credit market is far more sophisticated in the UK (and in other Member States) and we believe that the requirement in this Article will hinder the use of online and telephone channels to provide credit; which will, in turn, reduce consumer choice. 100. We believe that the way to tackle over-indebtedness is not to require lenders and intermediaries to advise each consumer individually, but to ensure (a) that adequate information, including database information, is available and sought before making credit decisions; and (b) that clear and informative information is available to consumers before signing up to credit and also in the credit agreement itself. 11 101. In our view, the provisions in the Directive dealing with advertising (Article 4), pre-contractual information (Article 6), database information (Article 8) and contractual information (Article 10) make this Article unnecessary as provided that information is clear, informative and uniformly presented, consumers should be more financially aware and better able to make an informed decision. Provided there is adequate access to database information, lenders should be able to make responsible decisions about a consumers’ ability to pay when assessing their credit worthiness. Q9: Do you agree with our position on a duty to advise? Article 6 (new) Overdrafts 102. Overdrafts and short term lending agreements of less than three months or on demand are generally excluded from the directive but 11 Hence the introduction in the UK of Consumer Credit (Advertisements) Regulations 2004, in force from 31 October 2004, Consumer Credit (Disclosure of Information) Regulations 2004 and Consumer Credit (Agreements) Regulations 2004, in force from 31 May 2005. 32 subject to certain information requirements. This article sets out information to be provided in relation to this type of agreement. 103. Below is a comparison of the information requirements in this article compared with the current requirements under the CCA. This table does not refer to overdrafts secured by first mortgages on domestic property. Directive Before the agreement The total amount of the credit The borrowing rate The APR by means of a representative example The charges applicable from the time the agreement is concluded and the conditions under which these may be amended The conditions and procedure for terminating the agreement. Requirements under UK Law At the time or before the agreement is concluded (CCA) The credit limit, if any (CCA) The annual rate of interest (CCA) Only where the overdraft is secured by a first charge (FSA Rules) The charges applicable from the time the agreement is concluded and the conditions under which these may be amended (CCA) The procedure for terminating the agreement (CCA) 104. We will be seeking clarification from the Commission of the reference to APR but otherwise do not see a major difficulty with this provision. Q10: Do the extra requirements of the Article cause lenders and borrowers any difficulties? Article 7 (new): Specific credit agreements 105. Article 7 (new) applies to a number of specific credit agreements which are excluded from the rest of the Directive. The following requirements apply to credit agreements falling within this category. 106. In good time before being bound by the agreement or offer, a consumer must be advised of the following before being bound by any agreement: 33 • • • • • the total amount of credit; the borrowing rate; the APR by means of a representative example; the duration of the credit agreement; and the amount, number and frequency of payments to be made. 107. Despite the “light touch” nature of these provisions, there are a number of credit facilities that we would prefer to be outside the scope of this Article and which would currently be caught by it. Student Loans 108. We believe that the Directive’s provisions are inappropriate for Government-issued student loans (income contingent student loans), which differ significantly from commercial loans, in terms of eligibility, interest and repayment. These loans are open to all eligible students, without reference to financial criteria; there is no interest in real terms; and repayment is based on income. The Department for Education and Skills, the Scottish Executive and the Department for Employment and Learning, Northern Ireland, provide a subsidy for these loans in the public interest. In particular, income contingent loans are currently exempt from the requirements of the Consumer Credit Act 1974 and we see no case for bringing them within scope of the Directive. 109. There are credit agreements for the “old” mortgage style student loan scheme, under the Consumer Credit Act. Although there is no lending to new borrowers under this scheme, some borrowers continue to receive loan payments under its provisions. In view of the relatively small numbers and the preferential terms, as with the income contingent scheme, we consider inclusion in the Directive inappropriate. Loans less than €300 110. As we have already explained under Article 3, we would prefer that agreements for amounts of less that €300 are regulated in the same way as other forms of credit (except for very small transactions, as is currently the case in the UK (i.e. the £50 lower limit)). There is a substantial business in the UK involving small credit agreements and as it is usually the most disadvantaged who require such credit we consider they should have the same protection afforded to other borrowers. The current minimum amount of credit required in the UK is £50 (approximately €70) and we would want to retain this lower limit. Credit Unions 111. In view of the maximum harmonisation approach we consider that Credit Unions should be subject to a bespoke regulatory regime by being 34 excluded altogether from the Directive. Credit Unions are locally based and there are few cross border issues associated with them. It is important that regulation does not inhibit the development of Credit Unions and the positive impact they have on the communities in which they operate. This is best achieved by leaving Credit Unions outside the scope of the Directive so that the UK Government can develop specific Regulations as it sees fit. However, our regulatory impact assessment has shown that a light touch regulatory approach suggested by the Commission would be acceptable if our preferred option of total exclusion from the scope of the Directive does not find the required support. Q11: Do you agree with the UK approach to Credit Unions? Refinancing Existing Debts 112. Article 7 is stated to apply to: “Credit agreements aiming at refinancing the existing debts of a consumer in order to avoid legal proceedings and where the terms do not have the consequence of putting the consumer in a worse situation than before the new agreement.” 113. In many respects this is commendable for it may encourage lenders to renegotiate new and perhaps better terms with borrowers who find they cannot afford the original agreement without the necessity of following all the rules contained in other Articles. However unless the language is tightened up and stricter parameters are laid down we feel there are considerable dangers that consumers may be exploited when they find themselves in a vulnerable situation. For example if unregulated, this type of business may be attractive to companies specialising in debt consolidation and as the reference to not “putting the consumer in a worse position” is rather vague there is scope for exploitation. The loose reference to avoiding legal proceedings could apply to any borrower with a number of commitments that are beginning to put a strain on his finances but where no individual lender has actually contemplated issuing legal proceedings. 114. We favour the opportunity presented by Article 7 to offer lenders a more flexible regime when they are dealing with consumers who are in financial difficulty and when the lender is genuinely prepared to offer terms that are in the best interests of the borrower. We will seek to tighten the reference to legal proceedings and are considering making it clear that the Article should only apply to the original lender who renegotiates an agreement, rather than specialist debt consolidators who may have purchased the debts, and where the re-negotiated terms are clearly in the interests of the consumer. 35 Q12: Do you have any comments on how the proposal contained in Article 7 can be amended so that the consumer clearly benefits and is not exposed to exploitation? 36 CHAPTER III: DATABASE ACCESS Article 8: Databases 115. Under the original draft Directive, this chapter had the much wider ambit of “Protection of Privacy”, but all provisions already covered by the existing directive on Data Protection have now been removed. We would support the requirements being set out more clearly, including defining the term “Databases” clearly as referring to credit referencing databases. The Amended Proposal leaves only two requirements in this Article: “For Member States to ensure that creditors from other Member States have access to their databases under non-discriminatory conditions;” 116. Ensuring that all creditors have equality of access to data is, in our view, a key requirement to ensuring a single and fair market, both for lenders and for consumers. We therefore strongly support maximum harmonisation of laws in this area which will allow lenders from other Member States to have access to the same level of information about consumers as domestic lenders. We also agree that the Directive should not prescribe the type of information to be held on each database. Q13: Do you agree with the UK position on Databases? “For creditors to inform consumers and guarantors, if they so request, of the result of any consultation immediately and without charge.” 117. Our position is to support this second requirement only insofar as it requires lenders to give immediately and free of charge, a “yes-or–no” decision to an application for credit. We are concerned that the second requirement may be seeking to achieve more than this. As drafted, it may require the lender to provide, to an applicant, whether they are successful or not, details of the full credit search that it has obtained as part of the decision making process, free of charge. We have some concerns with this: • the lender will not have the consumer’s full credit file. This is available only from the CRA, who is Data Controller of that data. Given that the CRA is Data Controller of the credit file data, the lender is not permitted to disclose it; the Article requires the lender to inform the consumer of the “result” of any consultation with a database. However, the same information provided by a CRA to two different creditors might lead to opposite results, depending on the criteria of each lender. Currently, lenders are 37 • only required to tell consumers that their decision to decline credit, or offer a lesser amount, is linked to the credit search and the lender has a duty to provide the address details of the CRA to the consumer. We are concerned that providing any more information than this to the consumer may result in lenders opening up their lending criteria to scrutiny not only by consumers but also by other lenders. We believe that this would work against fostering a competitive market; and • the Article provides that the consumer is to be given the information free of charge. Currently, the CRA will provide a consumer with a full copy of their credit file for a fee. This is in line with the provisions of the Data Protection Act 1998, which implements the European Data Protection Directive. It is not clear whether the proposed CCD requirement is in conflict with the current system. Q14: We would like to know of any concerns you may have arising out of this Article, including any concerns about the costs of implementation. 38 CHAPTER IV: FORMATION OF CREDIT AND SURETY AGREEMENTS Article 10: Contractual Information 118. This Article sets out the information to be included in credit and surety agreements. In our view, in order to ensure a fair market for consumers, the Directive needs to ensure that there is equality of information provided to the consumer in the credit agreement. This can be achieved through maximum harmonisation in this area. Ensuring that all consumers are given the same information in credit agreements will encourage them to access the wider European credit market with confidence. With this in mind, we have concerns about the lack of detail in the Directive as currently drafted. 119. We have broken this section down into three parts. The first sets out the information that the Directive requires to be given in credit agreements which is also required under UK law. The second section sets out the information which the Directive says should be included in credit agreements but which is not required by UK law. In this section we have considered each proposed item of information and commented on it. The third section sets out the information that our UK law requires from us that is not required under the Directive. 120. We have recently updated this area of UK law 12 and our requirements are prescriptive not only as to content but also as to the ordering of information. This is because we have found that the sophisticated nature of some credit products can mean that credit agreements are unwieldy and difficult for consumers to find their way around. Setting out requirements as to priority and order as well as content will, in our view, assist consumers in the UK from May 2005, and we would support introducing this kind of approach throughout all Member States. Again, to ensure clarity for consumers, we would avoid requiring information to be in included in the credit agreement that is not integral to the nature of the credit being provided. 121. Some information is important to consumers (e.g. setting out their rights under the Unfair Terms in Consumer Contracts Regulations 1999 (which implements the Unfair Contract Terms Directive)) but is not central to the nature of the credit being provided. We believe, this information should be contained, after the prescribed information, in an agreement or in an easily accessible document that the consumer can keep. The Consumer Credit (Agreements) (Amendment) Regulations 2004, and the Consumer Credit (Miscellaneous Amendment) Regulations 2004. 12 39 Directive information requirements that are already required to be shown under the UK Agreement Regulations • • • • • • • Credit agreements and surety agreements to be drawn up on paper or on another durable medium; All contracting parties and the guarantor to receive a copy of the credit agreement; Names and addresses of contracting parties; The duration of the credit agreement; The amount, number and frequency of repayments to be made; The insurance required; A statement of costs and amounts, which are not included in the calculation of the TCC but which are know to the creditor and are to be paid: (a) for overrunning the total amount of credit, (b) for overdue payments, with details of the arrangements for the adjustment of such charges, and (c) for default; The total amount of credit; The goods or services being financed; The borrowing rate, the conditions governing the application of this rate and any index or reference rate applicable; The periods, conditions and procedures for varying the borrowing rate; The total cost of credit and the APR based on the applicable assumptions; Description of security; The existence of a right of withdrawal, the period during which it may be exercised and the procedure for exercising the right; The fact that there is a right of early repayment, the procedure for early repayment and the costs arising therefrom, indicating the amount or the calculation method; and For Hire Purchase and conditional sale, termination rights. • • • • • • • • • Requirements under the draft Directive not referred to in the UK Agreement Regulations “Information regarding access to out-of-court complaint procedures with specification of the formalities to be followed when a creditor or credit intermediary makes use of out-of-court complaints procedures;” 122. Although there is already a Banking Code requirement in the UK and in the Financial Services (Distance Marketing) Regulations 2004 to provide consumers with information about access to out-of-court complaint procedures, this information is rarely shown on the agreement itself. This information is useful to consumers and will be particularly relevant where credit is offered cross-border. However, since it is not integral to the nature of the credit agreement, we would support displaying 40 this information on another document that the consumer can keep or the lender could include it in the agreement after the prescribed information. “For fixed duration fixed rate agreements where there is capital amortisation, a statement of account in the form of an amortisation table, the payments owing, and the periods and conditions relating to these amounts;” 123. This requirement appears to envisage, for fixed-rate loans, a table showing how much of each repayment goes towards satisfaction of the capital sum. Arguably, this would provide useful information to consumers, but equally, consumers may find that this information (which may extend to several pages) is simply information overload. We note that while amortisation tables are a requirement of the European Mortgage Code, they are only optional under FSA rules. Even if we take the view that personalised information about the capital amortisation of a loan will be useful to consumers, we do not think that it is needed in the credit agreement. The information is most relevant to early settlement and so we would support a more proportionate requirement to include a generic summary of the costs of early settlement, which mirrors our current UK law, with specific details of early settlement costs provided on request to the Consumer. There is evidence to suggest that consumers gain little by having a lengthy amortisation table available. 124. The UK’s approach, from May 2005 13 , has been to require all fixed sum credit agreements to give examples, based on a nominal amount of either £100 or £1,000, of the amount repayable if the loan is repaid at or shortly after the ¼, ½ and ¾ dates of the term. Once the provision of this information becomes the norm in the UK, we think that it will serve as a useful comparator and that it will serve as an aide to transparency when given at the outset of the agreement. Q15: Would lenders have systems difficulties in providing the personalised information currently required by the draft Directive? “For credit agreements where charges and interest are to be paid without capital amortisation, a statement showing the periods and conditions for the payment of the borrowing interest and of the associated recurrent and non-recurrent charges; “ 125. The requirement to give details of the constituent parts of the total charge for credit, including when interest rates apply and how and when interest is calculated exists under UK law 14 . However, we do not currently have any distinction between agreements with and without capital 13 14 Consumer Credit (Agreements) Regulations as amended Schedule 1 paragraph 24 Schedule 1 (9) and (10) Consumer Credit (Agreements) Regulations 1983 as amended 2004 41 amortisation. We would propose that this requirement apply to all credit agreements, as it is critical to explain the true cost of credit to the consumer. “The conditions governing the drawdown of the credit;” 126. There is no requirement to include the conditions governing the drawdown of the credit in credit agreements under UK law. There is a certain amount of uncertainty about the extent of the information that the Article requires to be given here. In relation to loans, we would expect this to encompass, for example, important information about a loan being paid to the consumer in instalments and we would support a requirement to include this kind of important information in the agreement. However, in relation to credit cards, the requirement might also encompass fairly generic information about using credit tokens, cheques and balance transfers to access the credit. This latter information would not, in our view, be key information that needed to be included in the prescribed information within the credit agreement. We would therefore support the amendment of this requirement so that only “key” or “relevant” information about the conditions governing drawdown of the credit needed to be included. “The fact that there is a right to be informed of the result of database consultation for assessment of creditworthiness;” 127. See our comments at Article 8. “The procedure to be followed to exercise the right of termination of the credit agreement,” 128. UK Credit Agreement Regulations deal with the right to terminate in respect of HP and conditional sale agreements as mentioned above. The right of withdrawal and the right to settle early are dealt with elsewhere in the Directive. Any other rights of termination would have to be described in the “small print” of any credit agreement. “Information concerning the consumer’s rights under the Unfair Contract Terms legislation, including conditions for exercising those rights.” 129. It is not clear what information is intended to be provided here. The Unfair Contract Terms Legislation 15 is fairly high level, making terms that are unfair to consumers unenforceable and giving examples of the types of terms that may be unfair. Even if the information provided were of a level that could be useful to consumers, it is not integral to the nature of the credit being provided, we would support setting it out in a separate leaflet or on another durable medium, which the consumer can keep or 15 The Unfair Contract Terms in Consumer Contracts Regulations 1999 42 the lender would be able to set it out after the prescribed information in the credit agreement. For further discussion, see our comments at Article 15. Q16: Please provide any specific comments you might have on these extra items of information that the Directive proposes should be included in credit agreements. Information required under UK law 16 but not required under the Directive • • • • • • • • • • • Applicable headings; Cash price of goods/services being financed by the credit; Amount of any advance payment payable; The constituent parts of the total charge for credit; Any different rates of interest which are payable in different circumstances under the agreement; Details of how and when interest charges are calculated and applied; Where information (e.g. amounts of repayments) is not known at the time of making the agreement, provision for listing the manner in which this information will be calculated; Details of how payments are allocated when different rates and charges apply in different circumstances under the agreement; Any scope for benefiting from tax relief; Details of when/where variations might occur during the agreement and that no account has been taken of such variations; and Description of goods taken in pawn. 130. As mentioned above, the UK would support a maximum harmonisation approach to contractual information or an approach which included a significant level of key minimum requirements. However, if introduced as currently drafted some information that we currently require under UK law would not need to be included. In our view, these are critical to properly describing the nature of the credit product being provided. We recommend that the UK argues for the inclusion of all of the above as information requirements in the Directive. In terms of transparency, our view is that it would be extremely difficult to ensure a fair and competitive market unless all of these information requirements were included. Q17: Do you agree that the UK should argue for the inclusion of all of the above information requirements in the Directive? Article 11: Right of Withdrawal 16 Consumer Credit (Agreements) Regulations 1983 as amended by the 2004 (Amendment) Regulations 43 131. Currently under UK law, only credit agreements concluded at a distance 17 and credit agreements that have involved some form of face-toface contact, and which have not been signed at the premises of the creditor or of a linked party, are cancellable 18 . The proposed Directive would make all consumer credit agreements cancellable, with a 14-day cancellation period. 132. In principle, a consistent approach to cancellation rights is good for transparency and therefore good for consumers, for consumer choice and also good for competition and for opening up a single market. 133. We are, however, aware that applying a 14-day cancellation right to face-to-face agreements to finance the purchase of goods and services may be problematic in some areas of the UK credit industry, in particular the retail credit and hire purchase industries. The Directive does not establish a right to demand payment for the goods or for a duty on the consumer to return the goods that are subject to the credit; it only establishes a right to cancel the credit. 134. In relation to retail finance agreements, this Article will affect point of sale debtor-creditor-supplier agreements, particularly where the goods are portable. As drafted, it is conceivable that a consumer could cancel his credit agreement and not return the goods leaving either the supplier or the lender unpaid. 135. UK hire purchase agreements are initially hire agreements with an option for the consumer to purchase. If the credit is cancelled, the consumer has possession of the goods. If an alternative form of payment is not forthcoming, the supplier or creditor will have to attempt to retake possession of goods that have now diminished in value. Whilst we argue for the specific inclusion of Hire Purchase agreements to be placed within scope of the Directive we may have to reconsider this policy if it is unlikely the provisions regarding the right of withdrawal will deal satisfactorily with the unique nature of HP agreements. 136. In both cases, the concern is that retailers may not release the goods to the consumers before the expiry of the 14-day cancellation period. This will be unpopular with consumers and retailers alike and will be bad for competition. 137. Our position is to argue for the inclusion of a specific provision making repayment a pre-condition of cancellation and ensuring that goods are returned or paid for by alternative means. Q18: Do you agree with the UK position on right of withdrawal? 17 18 s67 Consumer Credit Act 1974 and Financial Services (Distance Marketing) Regulations 2004 s.67 Consumer Credit Act 1974 44 Exclusions 138. • • Article 11(4) excludes from the ambit of this Article, Credit agreements secured with a mortgage (we would prefer to see an exclusion of all mortgages from the ambit of this Directive); Credit agreements to pay for goods or services which are cancelled without penalty as a result of the consumer exercising his right to withdraw from a distance contract for goods and services under the 1997 Distance Contracts Directive and the 2002 Directive on the Distance Marketing of Financial Services; Credit agreements to pay for timeshare agreements which are cancelled as a result of the consumer exercising his right to withdraw from the timeshare agreement in the first 10 days after execution under the Timeshare Directive; and credit agreements that have been concluded through the services of an “official”. It is not clear who is encompassed by the word “official” and we will be seeking clarification of this. • • Notification 139. Article 11(2) provides that the right to cancel will be deemed to have been properly exercised within the deadline if notification is dispatched before the deadline expires. Interest 140. Article 11(3) provides that only interest, calculated on the basis of the APR, may be charged on the repayment amount if the agreement is cancelled during the first 14 days. 45 CHAPTER V: ANNUAL PERCENTAGE RATE OF CHARGE AND BORROWING RATE Article 12: Annual Percentage Rate of Charge 141. In order to achieve a successful single market in consumer credit, the UK government’s position is that the APR calculation should be the subject of maximum harmonisation throughout Member States. 142. The APR is defined in the Directive as: “the total cost of credit to the consumer expressed as an annual percentage of the total amount of credit granted”. 143. Article 12 states that the APR equates, on an annual basis, to the present value of all agreed commitments and requires it to be calculated in accordance with a specified mathematical formula. We understand that the formula has an equivalent mathematical effect to the one currently prescribed by our current Total Charge for Credit Regulations. There is a reference to the capital growth factor being denoted by an exponent expressed in days divided by 365.325. 144. • • 145. • • • • • • • The total cost of credit must include: premiums for compulsory insurance; all other compulsory costs of the credit. The total cost of credit excludes: default charges; and charges other than the purchase price which the customer is obliged to pay whether the transaction is paid in cash or on credit; any optional costs associated with maintaining the account; any optional costs associated with using a credit card; any optional costs associated with payment transactions in general; premiums for optional insurance; Costs payable by the consumer on conclusion of the credit agreement to persons other than the creditor or the credit intermediary such as payments to notaries, tax authorities, registrars of mortgages and costs imposed by the authority responsible for registration (and sureties) sic are excluded. Assumptions to be used when calculating the APR 46 146. The Directive introduces a number of assumptions (below) for the calculation of the APR. These need to be examined as our support for maximum harmonisation is contingent on these being sufficient to meet the needs of both running-account and fixed-term credit calculations in advertisements and agreements. • • • That the credit agreement will remain valid for the period agreed; That the creditor and the consumer will fulfil their obligations under the terms by the dates agreed; Where the interest rate is variable but such variations are unquantifiable at the time of calculation, that the borrowing rate and other charges will remain fixed at current levels until the end of the agreement; Where there is freedom of drawdown, that the total amount is drawn down immediately and in full; Where there is no fixed timetable for repayment, and one cannot be deduced from the terms of the agreement and the means for repaying the credit, that the term of the agreement is one year; Where the agreement is open-ended, that there is a constant capital balance; and Where the agreement provides for more than 1 repayment date, unless otherwise stated, that the repayments are made on the earliest date provided for. • • • • 147. As already stated we consider that the UK Government policy should be that APR calculations should be subject to maximum harmonisation rules. In view of this the following key issues will need to be discussed. Reference to “representative” examples compared with reference to “typical” rates 148. The new Consumer Credit Advertising Regulations permit the use of representative information being shown in advertising if the advertiser wishes however there is no compulsion. Where there is compulsion is that in most credit advertising and mortgage advertising a “typical APR” is required to be shown. 149. The ”typical APR" is an APR at or below which an advertiser reasonably expects, at the date on which an advertisement is published, that credit would be provided under at least 66% of the agreements he will enter into as a result of the advertisement.” 150. We consider it is essential that the concept of a typical APR is maintained. Such a figure is particularly useful when lenders adopt a “personal pricing” policy so that the APR advertised is not misleading to 47 the majority of applicants for a product. A lender may charge a range of interest rates for a product depending on the circumstances of the borrower. We believe that maintaining the use of typical APRs across Europe will significantly aid transparency and enable lenders to compete on equal terms. In our view Advertisements carrying representative APRs displaying the range of rates will be confusing and discourage consumers from reading them. Assumptions used in calculating APRs 151. The Consumer Credit Advertising Regulations which came into force in October 2004 and the Agreement Regulations which come into force in May 2005 describe the assumptions that are used in calculating APRs in the UK for running account credit products (calculation of APRs for fixed sum fixed term credit are more straightforward ). The table below describes these and compares them with the Assumptions suggested in the Proposal. Assumptions Amount of credit UK Regulations (Advertisements) £1,500 (or amount of credit if known to be less than £1,500). Even repayment of credit and charges over one year so that nothing is outstanding at end of year. UK Regulations (Agreements) £1,500 or amount of credit offered if known at time of Agreement Even repayment of credit and charges over one year so that nothing is outstanding at end of year. EU Amended Proposal Amount of credit offered Term Based on terms of contract (if say, contract calls for 3% monthly payment minimum then term could be several years) if no minimum repayment then assume one year with constant amount of credit outstanding throughout year. 48 Assumptions Rate UK Regulations (Advertisements) “purchase” rate for credit cards UK Regulations (Agreements) “purchase” rate for credit cards Drawdown Repayment In full on day one Charges and credit repaid over one year In full on day one Charges and credit repaid over one year EU Amended Proposal “blended” rate over period of credit based on rates known to lender. In other words rates for balance transfers would be “blended” with purchase rates. In full on day one Where agreement is open ended capital or credit remains outstanding throughout term 152. Our White Paper on the review of the Consumer Credit Act 1974 published in December 2003 explained why we adopted the criteria shown above and we would prefer these assumptions to be carried forward into the new Consumer Credit Directive. We consider that, in particular, the reference to a blended rate can be misused by advertisers offering running account credit products and we believe that all credit cards should advertise APRs based on their purchase rate rather than any promotional rate offered for balance transfers. Similar considerations apply to the APR calculated for mortgages where initial discounts and temporary “low start” rates are ignored. APR used in Overdraft Agreements 153. UK Consumer Credit law does not call for an APR to be shown in advertisements or agreements for bank overdrafts (other than those secured by first mortgages). Instead any advertisement or agreement must show an interest rate that does not take account of any additional charges. This is known as the EAR (Equivalent Annual Rate) which takes account of the possibility that interest may be charged on interest but not of any fees charged for the overdraft. 154. The Amended Proposal suggests that all advertisements and agreements for overdrafts should carry an APR based on the assumptions shown in the above table. 155. We assume lenders would prefer to carry on showing annual interest rates in agreements and EARs in advertisements on the basis that no assumptions can adequately deal with the inherently flexible nature of overdrafts. 49 156. On the other hand provided the assumption are made clear to consumers we do not consider an APR is any more confusing for overdrafts than it is for other running account credit products such as credit cards and it has long been accepted that credit cards should carry APRs. 157. It seems to us that this is a point we can concede in our negotiations on the assumptions to be used in APRs. Overdrafts are now regarded as banking products in their own right and in view of the fact that many lenders make monthly charges for overdraft facilities it seems appropriate an APR should be calculated and displayed. In many respects overdrafts and credit cards can now be regarded as competing products and it seems sensible to bring overdrafts into line with Credit Cards with regard to the reference to APRs. Charges to be included in APR calculations 158. We consider all compulsory charges should be included in any APR calculation. We therefore will propose that all notary charges and other legal fees as described in the opening bullet points to this Chapter are included in any APR calculation. To achieve a consistent and fair market across Europe it seems appropriate that all such charges are included in APR calculations so that a borrower will have a true indicator of cost of credit regardless of the country where the lender is situated. Q19: Do you agree with our policy to seek maximum harmonisation on the subject of APR on the basis of the policy suggestions outlined? Hire Purchase 159. Article 12 states that where a hire purchase agreement provides an option to purchase exercisable on a number of dates, the APR must be calculated for each of these dates. Further, where the residual value of the goods hired cannot be determined, a linear amortisation shall be applied which makes their value equal to zero at the end of the normal hire period set out in the agreement. Q20: Given that we aim to retain the current provisions relating to the calculation of APRs for HP transactions, are there any difficulties associated with this proposal and if so what are they? Article 14: Borrowing Rate 160. The Directive defines the borrowing rate as: 50 “the interest rate expressed as a periodic percentage applied for a given period to the amount of credit drawn down”. 161. Article 14 states that the borrowing rate may be fixed or variable and that, if variable, any variation must be notified to the consumer on paper or another durable medium. 162. As part of the notification of variation, the Directive requires the following also to be given: • • the new APR (using most of the assumptions set out in Article 12); and a new amortisation table. 163. This would mean that any rate change, even one that is in the consumer’s favour, would need to be notified to the consumer personally. This is a change from current UK law and practice which is that, if a change in rate is made in a variable agreement, notice can be given by displaying details prominently at branches 19 and by giving the new rates alongside the old on telephone helplines and websites within three working days of the new rates coming into effect. 20 164. We do not recommend supporting a requirement to give details of the new APR and a new amortisation table to consumers every time the borrowing rate is changed. This change would be extremely costly to implement and we are not convinced that the cost would be worth it in terms of additional benefit for consumers. In fact, we think that this information may cause confusion for consumers. The APR is a useful comparator for consumers both in advertising for credit products and to indicate the cost of credit when concluding the credit agreement. However, the APR is only correct at the date of the agreement, because once the outstanding capital balance is reduced and the outstanding term changes, so does the APR. See our comments previously under Article 10 in relation to the proposed amortisation table. 165. On this basis, we would not support this requirement as it would cause considerable upheaval and cost to the credit industry and yet would not assist in terms of transparency for consumers, who will have been given details of the borrowing rate probably as a per annum or monthly figure up until the date of variation. Q21: Do you agree with our policy to resist the requirement that the new APR and amortisation table must be given when borrowing rates are varied? 19 20 s82 Consumer Credit Act 1974 Paragraphs 4.4 and 4.5 Banking Code, March 2003 51 CHAPTER VI: UNFAIR TERMS Article 15: Unfair Terms 166. The Council Directive 21 on unfair terms in consumer contracts covers contractual terms that have not been individually negotiated and therefore applies to most, if not all, consumer credit agreements which have standard terms and conditions. The Directive has been implemented into UK law in the Unfair Terms in Consumer Contracts Regulations 1999 22 . The Annex to the Unfair Contract Terms Directive sets out an indicative and non-exhaustive list of the terms that may be regarded as unfair. Article 15 extends the list of examples of terms which may be found by a court to be unfair to include terms in consumer credit agreements that have the object or effect of: “imposing on the consumer, as a condition for a drawdown, a requirement to leave as surety, in full or in part, the sums borrowed or granted, or to use them, in full or in part, to constitute a deposit or purchase securities or other financial instruments, unless the consumer obtains at least the same rate for such deposit, purchase or surety as the agreed annual percentage rate of charge;” 167. In other words, if a lender tries to impose, in return for granting the credit, a requirement on the consumer to invest in a security or deposit product or other financial instrument, this term may be found by a court to be unenforceable unless the consumer is given at least the same APR on the money invested as he is paying for the credit. We think this type of scenario unlikely to occur in the UK credit market and will be seeking clarification from the Commission about what they are seeking to achieve. “oblige the consumer, when concluding a credit agreement, to enter into another contract with the creditor, credit intermediary or a third party designated by them, unless the costs thereof are included in the total cost of the credit.” 168. This is presumably intended to seek to prevent consumers from entering into another agreement that is ancillary to the credit agreement, such as payment protection insurance, without knowledge of the cost of doing so. While we agree that this should be prevented, this is already partly achieved at Article 12(2), which requires lenders to include in the calculation of the APR the costs of compulsory insurance. It would be quite straightforward to extend Article 12(2) to encompass the inclusion of all compulsory costs associated with entry into the credit agreement, whether these relate to insurance or otherwise. On this basis, we do not 21 22 93/13/EEC of 5 April 1993, O.J. 1993 L 141/27 Statutory Instrument 1999 No. 2083 52 think that it is necessary or appropriate to include this section in Article 15 and we would advocate its deletion. 169. Another reason to argue for the deletion of this Article is that the unfair terms legislation already provides the consumer with protection against the use of unfair terms whether such term is contained in the indicative annex or not. In the light of this we do not consider that this Article is necessary. Q22: Do you support the inclusion of these terms in the Unfair Contract Terms legislation? If so, why? 53 CHAPTER VII: PERFORMANCE OF A CREDIT AGREEMENT Article 16: Early Repayment 170. According to the Directive, the consumer shall be entitled to discharge fully or partially his obligations under a credit agreement at any time and Article 16 entitles him to an “equitable reduction in the cost of credit”. Any indemnity claimed by the creditor must be fair and objective. It is not clear whether the Commission intends to provide that such indemnity must only be calculated on the basis of actuarial principles which would reflect new regulatory requirements shortly to take effect in the UK 23 . We would support the introduction of an indemnity calculated on the basis of actuarial principles, as this would create certainty for both business and consumers. 171. However, in the UK we have introduced an applicable notice or deferment period in order to accommodate the systems difficulties that would exist across the credit industry without such flexibility, and this is not reflected in the directive. Under the UK’s new regime, if a lender receives an early settlement request in writing, the settlement date becomes 28 days after receipt of the request. If the term of the credit agreement is more than one year, the settlement date for calculation of the rebate can be deferred for a further one month or 30 days. Consumers may make the usual payment in the deferred period and account must be taken of this when the early settlement figure is worked out. 172. We would support the introduction of a notice/deferment period. We believe that the introduction of early repayment calculated on actuarial principles and subject to a deferment period would establish a level playing field throughout Europe and indeed may allow more competition in the market place, as lenders would be able to charge any amount on early settlement, provided it is less than the total under the formula. 173. We do not support Article 16(3) as drafted which provides that no indemnity must be claimed for credit agreements where “the period used to fix the borrowing rate is less than one year”. Our view is that this would work provided that there was a certain notice period (say 28 days as in the UK regime) for lenders to reply to an early settlement request, which could be taken into account in the calculation of the indemnity. 174. Furthermore, we would not support an exemption for insurance companies from paying an indemnity when the debt is settled early, if consumers are required to pay indemnities. 23 Consumer Credit (Early Settlement) Regulations 2004, coming into force 31 May 2005 54 Q23: Would you prefer to see harmonisation in this area? Why? Article 17: Assignment of Rights maximum or minimum 175. We support Article 17 which provides that where the creditor’s rights under a credit or surety agreement are assigned to a third party the consumer and, where applicable, the guarantor, shall be entitled to the same rights against the assignee as he previously enjoyed against the creditor (including in relation to defences and any right of set-off); and the consumer must be informed that the contract has been assigned to the third party. Q24: Do you agree with our position on assignments of rights? Article 18: Ban on the Use of Bills of Exchange and Other Securities 176. Article 18 provides that the creditor shall not require or invite the consumer or guarantor to guarantee payment of their commitments under that agreement by means of a bill of exchange or promissory note. Moreover, the consumer or guarantor shall not be required to sign a cheque guaranteeing repayment, in full or in part, of the amount due. 177. We are concerned that this goes further than current UK law 24 and would prevent consumers from writing cheques guaranteeing full or part payment of credit. The UK has an extensive industry providing a service of delayed presentation of a personal cheque for between £50 and £100. We would oppose this prohibition on the basis that some UK consumers, particularly those who may not have access to mainstream lenders use post-dated cheques as a means of securing credit. We consider that the Commission should be looking to ensure that consumer protection measures are appropriate and proportionate, as set out in the 1987 Directive on Consumer Credit. Q25: Do you support our policy to maintain current UK law and retain the provisions contained in the 1987 Directive? Article 19: Linked Transactions 178. This Article on linked transactions is by no means clear. The Commission has accepted several European Parliament amendments, which seek to achieve different effects, and so this Article contains certain inconsistencies. The provisions of the 1987 Directive have not been 24 s123 Consumer Credit Act 1974 55 implemented consistently in the various Member States. As currently drafted, Article 19 reflects the contradictions that exist between the laws of Member States in this area. The introduction into the definitions (Article 2) of the concept of "Linked Credit Agreements" reflects the German interpretation of the 1987 Directive, and paragraphs on Joint and Several Liability set out the UK position. 179. In the UK, joint and several liability goes further than the provisions put in place in the 1987 Directive, and we do not want to see these crucial consumer protections being undermined by this Directive. For this reason, we would hope to find a compromise, which sets out a minimum level of liability, but allows Member States to go further and maintain national provisions such as joint and several liability. 180. Even though the German concept of “Linked Credit Agreements” is defined in the Directive, Article 19 in fact refers throughout to “Linked transactions”. In the UK, we define a “Linked Transaction” as a transaction which is not a credit agreement but which is linked to a credit agreement 25 and so, to avoid confusion, we would like to see more clearly defined terms. 181. The first concern arising from this Article arises from the definition of “Linked Credit Agreement” in Article 2(q). A “Linked Credit Agreement” is defined as: “An agreement where the credit in question serves to exclusively finance … the supply of goods or ... a service and the two agreements form, from an objective point of view, a commercial unit. It should be assumed that a commercial unit is involved where the supplier or service provider himself finances the credit for the consumer or, if it is financed by a third party, if the creditor uses the services of the supplier or service provider in connection with the conclusion, or preparation, of the credit agreement, or if the credit agreement makes reference to the specific goods or services to be financed with the credit” . 182. Linked credit agreements therefore appear to include (a) credit advanced by a creditor who is also the supplier of the goods/service or (b) credit advance to a consumer where a supplier acts as an agent of the creditor. This definition is close to the definition of “debtor-creditorsupplier agreements” in UK law 26 but, crucially, unlike UK debtor-creditorsupplier agreements, the definition does not appear to include credit cards, as it only envisages a service provider being involved in the conclusion of a credit agreement and not being involved in the fulfilment of the 25 The definition of Linked Transactions in s19 Consumer Credit Act 1974 includes transactions that are entered into in compliance with a term of the credit agreement such as compulsory insurance and transactions that are financed by a debtor-creditor-supplier agreement such as a finance agreement for the purchase of a sofa. 26 s12 Consumer Credit Act 1974 56 agreement (however, it will cover store cards). As currently drafted, therefore, this definition would restrict UK joint and several liability to cases where the supplier has acted as a credit intermediary and so credit cards would no longer be covered. We cannot support this and would argue strongly for an amendment that ensured that credit card users also benefited from joint and several liability protections. 183. Article 19 covers three areas: Cancellation of credit agreement linked to purchase of goods. 184. Paragraph (1) provides that where the consumer cancels an agreement for the supply of goods or services; his linked consumer credit agreement will also be cancelled. This paragraph goes further than current UK law 27 . 185. Paragraph 2a provides that the credit agreement must give the consumer information about the right of withdrawal outlined in paragraph 1. Creditor Liability 186. This area is currently covered in the UK by s.75 Consumer Credit Act 1974 and deals with the protections and remedies enjoyed by consumers when they purchase goods or services using credit where there is a pre-existing arrangement between creditor and supplier to supply the credit for that purpose. The UK’s s.75 regime provides effective consumer protection for consumers who use credit cards, hire purchase and retail credit on a joint and several basis between the creditor and the supplier. The UK Government would like to maintain this protection, but it is not commonly found in other Member States. 187. The current draft Directive, Article 19(2b) provides that a consumer may pursue remedies against a creditor who has “pre-existing agreements” with the supplier of goods or services where the goods or services, the purchase of which has been financed by the credit agreement, are not supplied, or are supplied only in part, or are not in conformity with the contract for their supply. We welcome the inclusion of this paragraph although it is more restrictive in its application than Section 75. The exact consequences of the provision and how it will work in practice are left to Member States to develop when implementing. Joint and several liability 27 s69 Consumer Credit Act 1974 provides that cancellation of the credit agreement operates to cancel any linked transaction 57 188. Article 19(3) is a minimum harmonisation provision, allowing Member States to continue to maintain any domestic laws that provide for joint and several liability. This takes into account of Section 75 in the CCA. 189. Clearly the final Directive may not include both Articles 2(b) and (3). We advocate taking a pragmatic approach to this part of Article 19 and, rather than trying to persuade all other Member States to bring their regimes into line with our own (which Article 19(2b) would require them to do), we would instead argue that this area is one that is suitable for a minimum harmonisation approach, providing for a common minimum level of harmonised protection, but allowing individual Member States to introduce increased consumer protection in this area if they so wish, as is provided in Article 19(3). We propose to allow the three propositions to remain as options for Member States to determine how to deal with credit financial transactions where the creditor and supplier have some form of arrangement between themselves. Q26: Would you support our approach of maintaining joint and several liability as set out in the UK? Q27: Do you agree with a minimum harmonisation approach in this area? 58 CHAPTER VIII: SPECIFIC CREDIT AGREEMENTS Article 21: Credit agreement in the form of an advance on a current account or a debit account. 190. There is an issue regarding the precise application of this Article but we assume it is intended to refer to running account credit agreements as well as overdrafts, and as such we would support such an approach Article 22: Open–end credit agreements 191. There are some issues regarding definition of “open-end credit agreement”. Assuming the definition applies to overdrafts and credit card agreements then there are some difficulties with this proposal from the point of view of both consumer and lender. However, Article 3(3) suggests that overdrafts should not be covered. We will seek further clarification from the Commission on this point. 192. Currently a consumer can terminate any credit card or overdraft facility at any time provided all accrued charges are met. The UK Banking Code allows banks to close a customer’s current account provided 30 days notice is given. We oppose a three month provision. 193. We can see that both lenders and consumers would suffer a disadvantage regarding the renewal of, say, credit card agreements, if the explicit approval of the borrower is required. Q28: Is there any need for this Article? circumstances should it be retained? If so, in what 59 CHAPTER IX: PERFORMANCE OF A SURETY AGREEMENT Article 23: Performance of a surety agreement 194. Firstly, Article 23 limits the term of a guarantee of an open-ended credit agreement to three years, after which it may only be extended with the agreement of the guarantor. There is no such requirement under UK law. 195. Secondly, the Article provides that the guarantor of a debt must be informed as soon as a default notice has been sent to the consumer. This mirrors UK law 28 , and as the consequences of non-compliance are not set out Member States are free to set out their own rules in this area. 196. Thirdly, a creditor can only pursue a guarantor for a debt if three months has passed since the consumer was served with a default notice and the consumer has failed to comply. This contradicts Article 24(1)(b) which suggests no specific time limits are imposed on recovery from the guarantor. 197. Finally, the amount guaranteed may only equal the outstanding balance of the total amount of credit and any arrears, and no other indemnities or penalties provided for by the credit agreement can be sought from the guarantor. Under UK law 29 a creditor is prevented from recovering from the guarantor more than he could have recovered from the consumer, but there is no limitation on recovering penalties on arrears from sureties. 198. In view of the complex nature of the law relating to guarantees we would recommend arguing for a minimum harmonisation approach in this area. Q29: In view of the differences between the Article and UK law do you agree we should seek minimum harmonisation? 28 29 s111 Consumer Credit Act 1974 s113 Consumer Credit Act 1974 60 CHAPTER X: PERFORMANCE OF A CREDIT AGREEMENT Article 24: Default Notice and Enforceability 199. Article 24 deals with default notices and enforceability in the event of non-performance of a credit agreement. The requirements are fairly high-level and do not at all reflect the substantial information and consumer protection requirements incorporated into UK law. For this reason, the UK Government’s position is to argue for a minimum harmonisation approach to this area, setting out the minimum standards required to be complied with across the EU, but allowing individual Member States to create further layers of regulation if they prefer. This would allow UK consumers to continue to benefit from the detailed information and notice requirements which lenders must adhere to when dealing with default and enforceability. 200. Subsection (1) requires Member States to ensure that: ‘disproportionate measures are not taken to recover amounts due to creditors in the event of non-performance of credit and surety agreements;" 201. We would like to see a clearer description of what constitutes “disproportionate measures” in order to ensure consistent application across the EU. "in the event of default, a default notice giving a reasonable period of time for compliance with the customer’s obligations must be served before any demand for immediate payment is made"; 202. This is consistent with current UK law 30 and it is proposed that the current period of 7 days before a creditor may commence action should be extended to 14 days under the Consumer Credit Bill. However, we propose that a provision is added which states that this does not prevent the creditor from treating the right to draw upon credit as restricted or deferred. 31 “in the event that the customer has not performed his obligations under the credit agreement, or in the event that he wishes to settle early, he and the guarantor may, on request and without delay, receive a detailed statement of account, free of charge, allowing them to verify the charges and interest claimed”. 30 31 s87 Consumer Credit Act 1974 As is currently provided in s87(2) Consumer Credit Act 1974 61 203. This requirement seems to envisage two different events both leading to a statement of account. First, if the consumer has not performed his obligations. In the UK, the consumer under ss.77 and 78 of the Consumer Credit Act 1974 is entitled to request such information already at any time. Second, if the consumer wishes to settle early. In the UK, the consumer may request such a statement under s.97 of the 1974 Act. “the creditor may not suspend the consumer's drawdown rights unless he justifies his decision and is required to inform the consumer without delay”; 204. We assume that this requirement would prevent lenders who offer running account credit from “blocking” the consumer’s access to the credit, as well as restricting access to fixed sum credit unless there was a justifiable reason and they informed the consumer of it right away. In relation to breaches of the agreement, the creditor under s.87(2) of the 1974 Act may take steps to prevent the debtor making further drawings of credit (e.g. not honouring cheques, demanding surrender of card or putting a block on the card being accepted by suppliers). There is no equivalent requirement in the CCA in cases of non-breach. However, we do have concerns that the requirement to tell the consumer before suspension could be problematic in certain cases, for example, a consumer who runs up large debts on a credit card without making any repayments would have to be informed before the creditor stopped the facility. In the intervening time, the borrower can obtain even more credit. Furthermore, in order to maintain money laundering safety nets and to protect against fraud, we would permit certain exceptions to any requirement not to tell the consumer before suspending his right of drawdown. Q30: Are there any problems with applying this requirement to running account credit? 205. Subsection (2) states that a default notice is not necessary: “If the creditor has evidence of fraud by the consumer,” 206. We propose that this is amended to read “evidence of fraud on the consumer’s account” in order to encompass fraud perpetrated by anyone not just the consumer. 207. If the item of property whose purchase is financed by the credit is used to secure the credit and the consumer alienates that property before the total amount of credit is repaid or uses the property in a manner inconsistent with the conditions of the credit agreement. Q31: Do you agree that a minimum harmonisation approach to default and enforceability is appropriate? 62 Article 25: Overrunning of the Total Amount of Credit and Tacit Overdraft 208. Under UK law 32 overdrafts are excluded from the form and content requirements of Part V CCA, which leaves them subject only to the duty to give information under a running-account credit agreement 33 . The Directive subjects authorised overdrafts to a “light regime” in terms of precontractual information (Article 6 (new)) and also subjects them to a requirement to give regular statements (Article 21) but otherwise excludes from the scope of the Directive all overdrafts on current accounts where the total amount has to be repaid within three months or on demand. 209. Therefore, although Article 25 focuses on cases where a consumer has exceeded the agreed total amount of credit, for the most part, this will not apply to unauthorised overdrafts in the UK as these will be repayable on demand. However, Article 25 will apply to consumers who go over their limit on their credit card or exceed the total amount of credit in other ways. The Article provides that if a consumer “significantly” goes over the total amount of credit for a period longer than one month, the creditor shall inform the consumer on paper or on another durable medium, that he has overrun the credit amount and shall inform him of the amount involved, the borrowing rate and/or the penalties, charges or interest on arrears applicable. 210. A further consumer protection built into the Article provides that any significant overrunning of the total amount of credit that exceeds three months shall be rectified, where necessary, through a new credit agreement providing for a higher total amount of credit. Q32: Do you think that this Article provides adequate regulation for unauthorised overdrafts? 32 33 s74 Consumer Credit Act 1974 s78 Consumer Credit Act 1974 63 CHAPTER XI: REGISTRATION, STATUS AND CONTROL OF CREDITORS AND CREDIT INTERMEDIARIES Article 28: Regulation of creditors and credit intermediaries 211. The provisions relating to the regulation of creditors and credit intermediaries have been considerably reduced in the amended proposal in contrast to the 2002 proposal. The text now states that: “Member States shall ensure that creditors and credit intermediaries are supervised by a body or authority independent from financial institutions or regulated”. 212. The Consumer Credit Act 1974 imposes an obligation on credit brokers to hold a licence. The Consumer Credit Bill proposes that this obligation be extended to persons who conduct businesses providing credit information services or engaging in debt administration. 213. The very broad provisions in the Commission's proposal will allow Member States to decide how creditors or credit intermediaries are regulated or supervised. In effect, the UK will be able to maintain and develop our licensing regime as we choose, although we note that if this Directive applies to secured lending, the definitions of "creditor" and "credit intermediary" could lead to an increase in the numbers of regulated firms. 214. We are nonetheless concerned about the implications for enforcement although the following rules will assist the Office of Fair Trading in the enforcement of the Directive. 215. The Office of Fair Trading will be able to use the Injunctions Directive to gain an injunction for infringements of national provisions transposing the consumer credit Directive. 216. The recently agreed Regulation on Consumer Protection Cooperation, will also help to link up national enforcement authorities and enable them to take co-ordinated action against rogue traders who abuse the freedom of the Internal Market in order to deceive consumers. It removes existing barriers to information exchange and cooperation and empowers enforcement authorities to seek and obtain action from counterparts in other Member States. Q33: Do you think that this Article is strong enough to protect consumers in an open internal market? Or do you think that such light requirements will upset the balance of competition and level of consumer protection? 64 Q34: Would it be more appropriate to introduce a passporting system similar to the banking Directives, where creditors or intermediaries would have to fulfil passporting provisions demonstrating that they are ‘fit’ before they lend cross-border? Article 29: Obligations of credit intermediaries 217. Article 29 deals with the obligations of credit intermediaries to indicate in advertising and documentation whether they are an independent broker, or whether they work exclusively with one or more clients and to give details of their fees. 218. Currently the Consumer Credit (Advertisements) Regulations 2004 do not expressly require an advertiser to reveal that he is a broker – although there is a strong argument that an advertisement would fail the overall test of not being misleading were a broker not to reveal himself as such. It would be similarly misleading for a broker to fail to disclose any special relationships that he has with specific lenders. This could have an impact on the person’s fitness to hold a licence under the Consumer Credit Act 1974 under the new fitness test proposed in the Consumer Credit Bill . Q35: Is there any reason why credit intermediaries should not be required to divulge whether they are an independent broker, or work with one or more clients? 219. The Directive limits the instances in which a credit intermediary can receive a fee, in whatever form, to instances when the following three criteria have all been fulfilled: • • • The amount of the fee is stated in the credit agreement; The credit intermediary does not receive a fee from the creditor; and The credit agreement for which he has acted is actually concluded. 220. UK Regulations do not require brokers to state the existence of fees separately charged in credit agreements, as they are prepared and issued by the lender and not the intermediary. We would not support their introduction into credit agreements. Instead, they should be more clearly stated in advertisements and pre-contractual information from the credit intermediary. 221. The credit intermediary will not be able to charge the consumer a fee if they are also receiving a fee from the creditor. 222. Credit intermediaries would not be able to charge a fee if the credit agreement for which he has acted is not concluded. In the UK, section 155 65 of the CCA allows customers who have not entered into a relevant agreement within six months following an introduction by a broker, to recoup their fee in excess of £5 from the broker. In effect, the broker can charge the consumer before the agreement is concluded and retain £5 if it is not. 223. Behaviour which goes against these requirements could have an impact on the person’s fitness to hold a licence under the Consumer Credit Act 1974 under the new fitness test proposed in the Consumer Credit Bill. Q36: Would you agree that the instances when a credit intermediary can charge a fee should be limited? If so, do you agree with the conditions above? 66 CHAPTER XII: FINAL PROVISIONS Article 30: Total harmonisation and imperative nature of the Directive’s provisions 224. Article 30 states that Member States may not introduce provisions other than those laid down in this Directive. We have discussed throughout this consultation document our suggested targeted harmonisation approach; see in particular under Article 3. 225. We will be seeking clarification of the exact extent of the ‘coordinated field’ which is harmonised by the directive so that those areas not covered may continue to legislated on by Member States. 226. We will also be seeking clarification that those areas that are subject to either limited information requirements or general propositions are minimum harmonisation measures which Member States can supplement with more further or detailed rules. 227. Once the level of harmonisation has been clarified, we would support the provision preventing the Directive from being deliberately circumvented, for example as a result of the way that the agreements are formulated. Article 31: Penalties 228. This is a requirement of Community law. Article 32: Out-of-Court redress 229. We support the use of out of court redress and agree that this should be encouraged in the Directive. These bodies should be established and encouraged to cooperate in order to resolve cross-border disputes. 230. In the Consumer Credit Bill, the UK Government proposes to introduce a compulsory ADR scheme for consumer credit matters, which will make it easier and quicker for consumers to challenge unfair credit practices. The UK Government believes that ADR will be less intimidating and more cost effective than going to court, for both consumers and business. Providing better opportunities for redress against unfair practices will encourage fair standards throughout the industry, increasing consumer confidence and ultimately benefiting business. 231. The ADR scheme will be provided by the Financial Ombudsman Service (“the FOS”) and the types of business to be included in the Consumer Credit Jurisdiction will be specified and will generally include 67 those businesses which hold licences under the Consumer Credit Act 1974. 232. Out of court settlement will also be encouraged by FIN-NET, the Network for settling cross-border financial disputes out of court which was launched by the European Commission on 1 February 2001. The Network aims to help businesses and consumers resolve disputes in the Internal Market rapidly and efficiently by avoiding, where possible, lengthy and expensive legal action. The network has been designed particularly to facilitate the out-of-court resolution of consumer disputes when the service provider is established in an EU Member State other than that where the consumer lives 34 . The FOS is a member of this network. Article 34: Existing agreements 233. We are satisfied with the Directive only applying to agreements from the date of entry into force. For further information on FIN-Net: http://europa.eu.int/comm/internal_market/finservicesretail/finnet/index_en.htm 34 68 SECTION D: PARTIAL REGULATORY IMPACT ASSESSMENT Partial Regulatory Impact Assessment - Consumer Credit Directive Contents Title of proposal Purpose and Intended effect Objective and an outline of the Directive’s proposals Background to proposal Economic context Risk assessment Options Costs and Benefits Consultation with small business: the Small Firms’ Impact Test Competition Assessment Enforcement and sanctions Monitoring and review Consultation Summary and Recommendation Declaration Annex I: Detailed breakdown of Benefits and Costs for Option 2 69 TITLE OF PROPOSAL Directive of the European Parliament and of the Council on the harmonisation of the laws, regulations and administrative provisions of the Member States concerning credit for consumers - "The Consumer Credit Directive" PURPOSE AND INTENDED EFFECT The Objective The overall objective of the Directive is to: ‘pave the way for a more transparent market, a more effective market and to offer such a degree of protection for consumers that free movement of credit can occur under the best possible conditions both for those who offer credit and those who require it’ 35 The proposal will replace Directive 87/1002/EEC as amended by Directive 90/88/EEC and 98/7/EEC. The aim of the 1987 Directive and subsequent amendments was to establish a Community framework for consumer credit with a view to promoting the establishment of a common market for credit and establishing minimum Community rules to protect consumers. The use of minimum harmonisation in the 1987 Directive has, however, led to a wide divergence in the laws of the various Member States in relation to consumer credit as they have been able to supplement Community rules with their own provisions. The objective of a new Directive is to create a genuine single market by establishing common and fully harmonised rules applicable to the credit market of Member States thus allowing creditors to make their services more easily available as they will only have to comply with one set of rules, and allowing consumers to enjoy the high level of protection offered by the harmonised rules and therefore have confidence in shopping cross-border. The measures aim to: • Introduce protective measures to bolster consumer confidence in the market, both at national and cross- border levels; • Establish a regulatory framework that is sophisticated enough to persuade Member States that they no longer need to resort to additional protective measures; • Use these two initiatives to create the conditions that will bring about the internal market for the benefit of creditors and consumers alike. The main aims of the Commission’s amended proposal for a directive are: • Define the directive’s scope to cover the modern credit market, with a split between consumer credit and mortgages for property purchase. The effect is to exclude only those mortgages taken out to buy or renovate a Outline of the Directive’s proposals 35 Commission of the European Communities (2002), 'Proposal for a Directive of the European Parliament and of the Council of the EU on the harmonisation of the laws, regulations and administrative provisions of the Member States concerning credit for consumers', 2002/0222 70 • • • • • • • • property. It is clear from this that lending for equity release or debt consolidation purposes would be caught by the Directive. Limit the provisions of the Directive to information requirements for certain areas including overdrafts and Credit Unions. improve access by lenders to negative data on a borrower to permit a more accurate assessment of risk and ability to pay. harmonise the requirements for advertising consumer credit products and the pre-contractual and contractual information requirements throughout the EU to make them more comparable for consumers. improve consumer protection measures, including introducing a duty to advise and a universal 14-day right of withdrawal. standardise the calculation of the APR by clarifying costs which must be included and assumptions used in the calculation. introduce throughout Europe a right for a consumer to settle credit early and entitle them to an equitable reduction in the cost of credit. prohibits the use of bills of exchange or promissory notes by either consumers or guarantors to guarantee payment of credit. introduces new provisions on linked credit agreements while maintaining existing provisions on joint and several liability. Economic context Total size of the European consumer credit market Total unsecured credit in EU15 totals EUR 500,000 million corresponding to more than 7% of GDP. 36 The UK position At the end of 2002 the UK had the largest consumer credit market in the EU accounting for over 30% of consumer credit in EU15 37 . This market has been expanding rapidly with total consumer credit passing the £1 trillion mark in summer 2004. The growth here has been the highest in Europe over the last decade. This rapid growth is depicted in figure 1. However, some analysts are starting to predict that this rate of growth will slow in the UK over the coming years: ‘The UK and the Netherlands are likely to see among the slowest growth in retail credit because of the borrowing boom of recent years…Spain should continue to see faster near term growth, with strong potential released in France over the next two years’ 38 36 BUE bulletins as quoted on p3 of ‘Directive of the European Parliament and council: on the harmonisation of laws, regulations and administrative provisions of the Member States concerning credit for consumers’, 2002 37 Figure as quoted in OXERA report ‘Assessment of the economic impact of the proposed EC Consumer Credit Directive’ - figure derived from data available from the European Central Bank and the Bank of England. 38 ‘Retail is in the Detail: How Financial Institutions Can Grow Revenue in the 21st Century’, Deloitte 71 MONTHLY CHANGES TO NET LENDING £ MILLIONS 14000 12000 10000 8000 6000 4000 2000 0 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 unsecured lending secured lending Source: Bank of England: LPMRLMH and LPMVTVJ Figure 1 Monthly year on year growth in net consumer lending Current cross border trade At present there are a significant number of different approaches to national credit regulation and consumer credit markets in Europe are very segmented with most trading taking place within domestic markets. As table 1 shows transactions within Europe have been increasing slightly, although from a low base 39 . Table 1: Domestic and cross-border lending in the financial sector in the Euro areas (1997 – 2001) Total credits to non-banks (bn Euro) Domestic transactions (%) Transactions with countries in the Euro area (%) Transactions with ROW (%) 1997 5,905 91.6 2.2 6.2 1998 6,349 91.6 2.6 5.8 1999 6,867 90.4 3.0 6.6 2000 7,491 89.9 3.2 6.9 2001 7,952 88.9 3.4 7.7 Source: Cabral, Dierick and Vesala 2002. Including credit to public authorities. The main barriers to cross border trading fall broadly into the following categories: 1. Difference in culture and language 2. Personal preferences about the products of national lenders (trust, reputation, convenience etc.) The Directive aims to go some way in addressing some of the issues surrounding the second point since it will ensure consumers will have the same protection across member It should be noted that this table includes credit to the corporate sector which presumably represents a higher share than to consumers which suggests that cross border transactions for consumer credit accounted for less than 3.4% of the overall market in 2001. 39 72 states. According to the Commission ‘no less than 70% of consumer groups are calling for greater European Level harmonisation of the regulations that protect consumers’. 40 RISK ASSESSMENT Reducing barriers to a single consumer credit market in the EU could result a significant rise in the cross border trading between the UK and EU. Current barriers such as the lack of standardised information requirements, inability to share data and insufficient standardisation of APR calculations to allow price comparison make it difficult to advance a transparent cross boarder market. With evidence that the UK market is becoming increasingly saturated such cross border trade could provide significant benefits to the UK economy. But it is difficult to see the emergence of a cross border market in consumer credit without action specifically targeted at removing the remaining barriers. However, the current attempt by the Commission to agree a maximum harmonisation Directive has significant risks for the current UK market. Consumer credit markets across the EU are very different in nature and tailored to specific consumer needs and national attitudes towards credit. Harmonising consumer credit laws across all Member States could potentially mean the loss of significant consumer protections in the UK and would place considerable new regulatory burdens on lenders. The UK credit market is the largest within the EU, extremely competitive and very diverse in the credit products available to consumers. New regulatory burdens could potentially reduce the diversity of products, drive costs up and lead to a reduction in the availability of credit to the sub-prime market i.e. consumer with low income who would find at difficult to access mainstream credit to appropriate prices. The following analysis of the policy proposals currently contained in the Directive will demonstrate the significant risk associated with the proposal as drafted. As a result we are evaluating a number of alternative options to ensure minimum extra regulatory burdens for industry and maximum retention of existing consumer protections whilst at the same time removing real barriers to cross border trade. 40 ‘Directive of the European Parliament and council: on the harmonisation of laws, regulations and administrative provisions of the Member States concerning credit for consumers’p4 73 OPTIONS Option 1 - do nothing, i.e. reject the proposed directive For the UK industry and consumers this option bears some significant advantages. The UK government is currently concluding a substantive reform of the UK consumer credit regulations which have addressed many of the concerns that the Directive seeks to address. A Consumer Credit Bill to introduce further reform is part way through its Parliamentary passage. These reforms were expensive to industry and demanded a significant increase in regulatory requirements to ensure consumers have access to a transparent, fair and competitive consumer credit market. The reform was tailored to the specific needs of the UK market. Option one would ensure no further upheaval to the market, no further regulatory costs and burdens and would avoid the loss of UK specific protections. However, this option does not address any of the market opening measures needed to foster genuine cross border trade in consumer credit. A significant number of Member States are pressing for such market opening measures and in the long term such cross border trade may be profitable for the UK credit industry due to its offer of highly developed and sophisticated products at very competitive prices, this in turn may reduce prices further for consumers. As this proposal is subject to qualified majority voting there is a real risk for the UK of not succeeding in blocking the proposal and therefore we may have to be forced into accepting a proposal which may harm UK business and consumers alike. Discussions with other Member States indicate, whilst there is concern among many regarding various provisions contained in the proposal overall most member states would like to see a Consumer Credit Directive adopted. Option 2 - Accept the proposed Directive substantially in its current form This option would overcome some of the current barriers to a cross border consumer credit market and potentially lead to a more competitive consumer credit market, as set out in the high level benefits section. However, the cost associated with a significant number of the proposed policies is substantial (see cost section below). The increase in cost for industry, the increase in regulatory requirements and the potential loss of consumer protections could lead to a reduction in the number of credit products on offer, increase the cost of credit and reduce the confidence consumers have in the current UK market. As a result this could lead to significant reductions in affordable credit particularly for the sub prime market. UK business has already borne costs of complying with the 2004 Regulations, and will bear some costs if the Bill is passed; a revised Directive would impose further costs on them. Option 3: qualified support for the Directive and its overall objective, whilst securing significant amendments to the proposed text This option seeks to modify the proposal in certain areas i.e. rules on level of harmonisation, mortgages, right of withdrawal, duty to advise and responsible lending. 74 The necessary amendments will be verified in the consultation but a number of alternative proposals are evaluated below (cost section below). The amendments mentioned should ensure minimum disruption to the existing UK market and maintain the high level of current consumer protection. They would also ensure the removal of real barriers to cross border trade, whilst recognising that a move towards harmonised rules across all Member States must be a process and that this Directive cannot deliver fully harmonised rules in one stage due to the very different nature of national consumer credit markets. Where possible we have aimed to estimate the order of magnitude of the costs and benefits of these options in the section below. We will seek to further add to and refine these estimates based on responses to our consultation document. COSTS AND BENEFITS The costs and benefits each of the three options outlined above manifest in two ways: 1. High Level Benefits associated with accepting the proposal These benefits accrue the UK as a result of accepting the proposals in their current form (Option 2) and under the UK proposed amendments to the Directive (Option 3) 2. Costs and benefits relating to each of the articles of the Directive For simplicity, the costs and benefits resulting from each article of the Directive are summarised in a table. The detail is included in Annex A We will examine each of these in turn. High Level Benefits Potential benefits resulting from harmonisation of consumer credit regulations In this section we focus on benefits that reflect the potential gains that could be made from harmonising regulation across the EU –specific costs and benefits relating to individual articles are discussed in the following section. A full harmonisation approach should make cross border trade easier, both for consumers in terms of reassuring them that there are consistent standards of consumer protection across member states, and for business, by providing a standard set of regulations to comply with. Facilitation of cross border trade should, in principle, improve competition and efficiency amongst consumer credit markets within Europe. However, the same result can be achieved through a targeted approach to harmonisation. If the Directive harmonised key provisions such as the exchange of data, the calculation of APRs, advertising, pre-contractual and contractual information but allowed Member States to vary their specific consumer protection regulations, the benefits above could be achieved without losing important national consumer protections and without the provision being too onerous to business. We consider the benefits to the UK economy, consumers and credit providers. It is very difficult (if not impossible) to accurately estimate the benefits that can be gained from 75 such an approach – this section, therefore, aims to give further background, discuss avenues through which benefits may accrue and provide an indication of the potential magnitude of the overall gains. Benefits to UK firms At present (and following the 2004 regulations) the consumer credit market in the UK is highly tailored to the complex and diverse nature of credit products on offer e.g. on advertising and form and content. Systems such as the databases used for credit checking in the UK are also much more sophisticated than in other Member States. By having to comply with these regulations, UK firms are at a competitive disadvantage in comparison to other members states which are currently subject to less detailed requirements. By ensuring that regulation is harmonised across Europe, the Consumer Credit Directive will ensure all firms are operating in the same environment – benefiting UK firms. Given their current share of the European credit markets, UK firms are well placed to take advantage of benefits of harmonisation and further growth of European credit markets. Indeed expansion outside of the UK is likely to become increasingly important if the predictions of slowing UK consumer credit growth are to be believed. The degree to which the proposed legislation would increase cross border trade is uncertain, however even if UK firms were able to capture only 1% of European credit markets (outside the UK) this would result in increased consumer credit provision of around £35bn bringing increased economies of scale. These cross-border benefits from harmonisation would become more significant in the long run as the levels of borrowing within the 10 new member states tends towards those of the original EU15. See Figure 2 below, setting out current outstanding consumer credit per capita and highlighting the potential grow area for consumer credit in the New Member states. Figure 2: Outstanding consumer credit per capita (Euros) 76 Set against this benefit is the possibility of UK firms losing some of their market share to other European companies. There is evidence that the UK enjoys higher margins on unsecured credit than other EU member states. 41 This would make the UK an attractive market for foreign players to enter. However, given the fact that UK firms are at an advantage since they already operate in one of the most competitive and innovative markets they should be well placed to meet additional competition in domestic markets and to expand elsewhere in Europe. Overall it seems likely that UK firms may benefit through increased growth and expansion, and from the potential economies of scale that this may bring if the Directive succeeds in making cross border trade easier. These potential benefits should also be compared against the costs to firms in meeting the proposed regulations – these are set out in more detail in the section considering the specific Articles. Potential benefits to UK consumers 41 Consumer credit margins in the UK are around 10% compared with 6% in France and just 4% in Germany and Spain. Source: ECB, 2002 as quoted in ‘Retail is in the Detail: How financial institutions can grow revenue in the 21st Century’ Deloitte. 77 UK consumers already have the advantage of operating in one of the most competitive credit markets in the world with over 4,000 active credit providers 42 and high competition leading to falling rates e.g. weighted credit card APRs have fallen by over 30% between Dec 1998 and Jun 2004. However, any aspect of the Directive which makes it easier for foreign firms to enter the UK market will assist in further developing competition and potentially bring down prices for consumers. As mentioned, margins on consumer credit in the UK are still relatively high indicating there may be further scope for price reductions. Consumers are also set to benefit from any economies of scale that arise from firms expanding their operations into other European markets. These benefits may be passed onto consumers in terms of lower interest rates and charges. Another avenue for potential benefit is through increasing product choice as competition within the market increases. Though arguably this is not so relevant to UK consumers since the sophistication in UK markets means that choice is already extensive, and UK firms have often led in terms of developing new and innovative consumer credit products. Consumers may also benefit from increased protection. These will be highlighted in more detail in the following benefit section in relation to specific articles. Again, these potential benefits need to be weighed up against the increased costs of applying the proposed regulation that may be passed on to consumers. As we note later in the RIA some of these proposals may also have a detrimental effect in terms of reducing access to credit, or requiring more action from consumers before gaining credit. Economy wide effects As well as the specific impact on UK consumers and firms there are a number of knock on effects that should also be considered which are mentioned briefly below: • • Where UK firms are able to expand gaining market share there will be benefits in terms of increased employment. Where increased competition leads to better deals for consumers consumer spending may increase (though if access to credit reduces or regulation leads to cost increases the effect will be reversed) impacting across the economy 2. Costs and benefits relating to substantive articles of the Directive The costs and benefits resulting from accepting the Directive in its current form are summarised in Table 2, as such they represent the costs and benefits for Option 2. Option 1: Do nothing, i.e. reject the proposed Directive This option would not lead to any changes to the existing UK system and hence would not lead to any additional costs or benefits. However this option would obviously forego 42 Based on MORI research done on behalf of the DTI. 78 the costs or benefits resulting from the implementation of the Directive (High level benefits and the costs and benefits set out in Table 2). Option 2: Accept the proposed Directive substantially in its current form The costs and benefits for Option 2 – Accepting the directive in its current form, are summarised in the table below. Table 2: Costs and Benefits resulting from accepting the Directive in its current form Article Secured Lending Article 3.2.a Secured lending not for the purchase or transformation of private immovable property would be included in the scope Costs Significant elements of market for secured lending would be captured by the directive. Those elements would experience significant costs associated with: Transitional costs associated with changing the current regime: new systems, training and competence and management/ supervision time of £136m Wasted costs where national standards are moved or diluted Reduced consumer protection as shift from tailored regime to ‘one size fits all’ legislation Transitional costs associated with introducing an APR calculation to overdrafts Reduction in flexibility regarding a upward change to the overdraft limit Administrative costs associated with processing formal contracts that may later prove unnecessary Limited transition costs as the proposed legislation is similar to that which already exists Benefits LITTLE BENEFIT BEYOND CURRENT DOMESTIC REGULATION. UK Recommendation Exclude all secured lending from the scope of the Directive Overdrafts Article 3.3, 6, 21 & 25 Partially excluded, but introduction of APR and some information requirements Credit Unions Article 3.4.c & 7 Subject to a ‘light touch regime’ which includes information requirements Consumers will be aware about the cost of, and penalties associated with overdraft facilities Consumers should incur fewer penalty charges The use of APR will allow consumer to compare overdrafts to other forms of credit Limited benefits as the proposed legislation is similar to that which already exists Support partial exclusion of overdrafts. Support exclusion of credit Unions , or alternatively accept Directive as drafted. 79 Advertising Article 4 Sets out standard information to be included in adverts. Significant differences with UK regime as no specific triggers, no relative prominence of information, APR not principle comparator, introduces representative examples Responsible Lending Article 5.1 Introduces a principle of responsible lending which includes provision of precontractual information and requirement for creditor to assess the consumers’ creditworthiness. Pre-contractual information Article 5.2 & 5.3 Sets out pre-contractual information requirements similar to UK Duty to Advise Article 5.4 Creditors must seek to establish the most appropriate type and total amount of credit One-off transitional cost to lenders - estimated at £40m The proposed legislative change would forfeit some proportion the estimated savings from the recent simplification of the regime estimated at £42 million per annum Benefits of harmonisation: UK lenders would be able to offer their products in other member states without having to comply with different regulations Transparency: Consumers would have the same information across Member states. Amend article to introduce some more sophisticated triggers and rules on relative prominence. Increased time for credit agreements to be set up. Higher processing costs could be passed on to consumers Consumer Protection: Legislation may prevent consumers from taking on commitments that cannot be repaid Delete article on responsible lending but ensure that there are provisions on precontractual information, licensing of lenders, and the right for consumers to appeal. Limited transition costs as the proposed legislation is similar to that which already exists. Such costs could be phased in. Reduces barriers to cross border lending and borrowing Transparency: Consumers would have the same information across Member states. Increased clarity customers on the suitability of credit products. Should reduce the number of consumers taking on unsustainable debts Support. Database access Article 8 Access to databases in Member States under non-discriminatory conditions Contractual Information Article 10 Sets out requirements for contractual information roughly equivalent to UK provisions Right of Withdrawal Article 11 Introduces a 14 day right of withdrawal to all Transitional training costs incurred by lenders estimated at £23 million, some of which would be ongoing Ongoing procedural cost of up to £3 per transaction which could be passed on to consumers Potential shift in demand towards higher cost phone sales Time costs to consumers who do need such advice Potential narrowing of choice available to consumers Removal of shadow limits means that lenders would have to access CRAs more often. The resulting costs may be passed on to consumers. Delete duty to provide advice. Possibly, replace with requirement for creditor to supply a summary table of the credit products that they provide. Increased availability of data across the EU creates opportunities for well developed domestic CRAs to enter EU market Support article as drafted. Assuming that the article requires no changes to domestic legislation there would be no costs. However, if any change were required, transitional costs could reach £160m Transparency: Information would be the same for consumers and lenders across the EU. Support article subject to minor amendment. Lenders may withhold the product until the cooling off period has passed. Some consumers may incur higher borrowing costs to avoid this. Consumers will be able to take full advantage of competition in the market Provides the consumer with a degree of protection Support in principle, subject to outcome of the consultation. 80 consumer credit contracts Calculation of APR Article 12 Sets out formula and assumptions for calculating the APR and lays down calculation for the total cost of credit Early Repayment Article 16 Sets out right to early repayment subject to equitable reduction in total cost of credit. No indemnity on loans under one year. Linked Transactions Article 19 Provisions in Article 19 are unclear. Possible replacement with UK provisions on joint and several liability with ‘linked credit agreements’ which would not extend to credit cards. Default notice and enforceability Article 24 Creditor would have to inform a consumer without delay if they wanted to suspend the consumers’ drawdown rights. Regulation of creditors and credit intermediaries Article 28 Member States shall ensure creditors and credit intermediaries are supervised or regulated. Obligation of credit intermediaries Article 29 Introduces information requirements on brokers, and rules on fees. Lenders might incur interest during the time of the credit switch. Assuming that the article requires no changes to domestic calculation of APR there will be no transitional costs. However, if changes are required there will be significant transitional costs associated with training and administrative changes as well as detriment associated with confusion to consumers. Minimal costs as the proposed legislation is similar to that which already exists. from unsuitable agreements. Transparency: consumers will be able to compare deals across the EU. Support harmonised calculation of APR, but with amended assumptions and deletion of representative examples. No benefits in excess of those already captured by domestic legislation Support principle of early repayment but amend to allow indemnities on loans of less than one year. Loss of ‘free insurance’ may cause confusion and some detriment to consumers who thought they were covered Transitional costs would start at £20 million. Customers who do not wish for this insurance would not have to pay for it. Increased competition in the relevant insurance market means that consumers who choose to take insurance can get a better deal. Amend article to all UK to maintain provisions on joint and several liability. Transition costs to lenders from developing post-contract information is estimated at £32.6 million Ongoing costs are likely to be small Consumers will be more aware when their drawdown rights are suspended, foregoing penalty charges that they might otherwise have incurred Support. None (already covered by UK domestic legislation) None Support. Transitional costs to the lender could be low if the legislation was phased in. Some consumers may benefit from the small amount of additional information above that available under current UK regulation. Support, subject to consultation. For more details and a in-depth analysis of the issues raised in this table see Annex 1 Option 3: qualified support for the Directive and its overall objective, whilst securing significant amendments to the proposed text. 81 The preferred UK position is to support the Directive to secure the internal market benefits, conditional on securing the following amendments, which redress the imbalance of costs and benefits as shown in the table above. We recommend:• • • • • • the removal off all secured lending from the Directive; the removal of the duty for lenders to advice consumers of appropriate credit products; Credit Unions to be excluded from the scope of the Directive or, if included, only to be governed by minimum information requirements; an exemption for public loans for vocational training and education; More sophisticated requirements for the advertising provisions; removing the concept of responsible lending but ensuring that there are adequate provisions on pre-contractual and contractual information, advertising and the licensing of lenders; Maintain the UK approach to regulating joint and several liability. • Secured lending Suggested amendment: exclude all secured lending from the scope of the Directive. Benefits The exclusion of all secured lending from the scope of the Directive would have the benefit of allowing the UK to retain the current balanced and proportionate regulatory regime that offers consumers considerable protection (including access to Financial Ombudsman Service and Financial Services Compensation Scheme) whilst maintaining a diverse and dynamic market in mortgage products. Costs The exclusion of all secured lending from the scope of the Directive would not bring about any additional costs. If the partial exclusion for secured lending was maintained, but the Directive was subject to minimum harmonisation, there would continue to be costs for the UK, including an increase in the number of regulated firms with associated transitional and ongoing monitoring and compliance costs. Advertising Proposed Amendment: Introduce more sophisticated requirements for the advertising provisions Benefits Taking the key features required under the Directive and adding some more sophisticated triggers and rules on relative prominence. Creating a hierarchy of credit advertisements that require specific information in response to the inclusion of other information and statements in the advertisements. As stated above, 82 whatever the form of Article 4, lenders and consumers would benefit from a unified approach to the advertising of consumer credit across the EU. The particular benefit of this approach would derive from its similarity to existing UK rules that both lenders and consumers had come to know and to trust. It is well understood that the UK has the most sophisticated consumer credit market and as such consumers are offered a very wide range of products. Our advertising regulations are designed to deal with the complexity of the home market and much of the detail could usefully be added to the current proposals contained in Article 4. This will help make the proposed Directive more future proof as UK type credit products are increasingly offered across borders. In addition the consumer benefits of £41m per annum identified when developing the domestic regime would be maintained. Costs Taking the key features required under Article 4 and adding some more sophisticated triggers and rules on relative prominence. Creating a hierarchy of credit advertisements that require specific information in response to the inclusion of other information and statements in the advertisements. Such an approach – closer to the UK Regulations – would minimise the costs associated with a change to new rules. While any differences from the existing UK Regulations would involve one-off costs for lenders associated with systems changes and the reprinting of literature, these would be minimised if the differences from the UK approach were themselves limited. Similarly, an EU approach that followed the spirit of the UK regime would impose no significant ongoing costs and would avoid the confusion to consumers that would inevitably arise if there were significant changes following on from the 2004 regulations. Responsible lending Proposed Amendment: Delete article on responsible lending but ensure that there are provisions on pre-contractual information, licensing of lenders, and the right for consumers to appeal; Benefits and Costs Deleting the article on responsible lending but ensuring that there are standard provisions on pre-contractual information, licensing of lenders and the right for consumers to appeal would not bring any additional benefits over the current UK system as we already have requirements for pre-contractual information and the strengthened licensing regime combined with the new unfairness test and ADR will ensure better consumer protection. However, ensuring that all these provisions are present in the Directive will benefit consumers shopping cross-border and bolster their confidence. Duty to provide advice Proposed Amendment: The removal of the duty for lenders to advice consumers of appropriate credit products; Benefits Rather than a duty to recommend the most appropriate credit product for the consumer, the article could be amended so that the lender must provide the consumer with a 83 summary table of the credit products that it offers. There could be a check box to be filled in by the consumer to confirm that he/she is aware of these alternative products. Consumers who do not require advice need not incur the time costs associated with receiving advice. Costs Rather than a duty to recommend the most appropriate credit product for the consumer, the article could be amended so that the lender must provide the consumer with a summary table of the credit products that it offers. There could be a check box to be filled in by the consumer to confirm that he/she is aware of these alternative products. Lenders providing more than one type of credit product will incur transitional costs associated with the re-design of contract, estimated at £3 million, but these would be significantly less than the substantive training resource costs required to advise consumers, estimated at £20million. These limited costs make it unlikely that lenders would narrow the range of products they offer as they have an incentive to under the current drafting. The check box would be consistent with the article on responsible lending and would not require lenders to keep a record of the advice given to consumers. There might be some skewing of competition toward the one product lender but not on the scale implied by the current legislation. Joint and several liability Proposed Amendment: Maintain the UK provisions on joint and several liability. Benefits If we were to maintain UK provisions on Joint and Several Liability, but did not extend them to other Member States, all consumers would continue to benefit from the protection offered by the provision and there would be no cost to UK lenders in terms of altering the existing system. Costs If we were to maintain UK provisions on Joint and Several Liability, but did not extend them to other Member States UK lenders would be disadvantaged vis-à-vis overseas lenders when lending in the UK due to the costs of providing the additional consumer protection; but would compete on level terms elsewhere in the EU. 84 CONSULTATION WITH SMALL BUSINESS: THE SMALL FIRMS IMPACT TEST Since the Commission issued its first draft Directive in 2002 we have engaged with key trade associations whose membership predominately comprises small businesses. We have also met with the owners of small lending businesses from southern Scotland, north Wales, the north west of England, Swindon, Hull and London. In addition, we have obtained advice from businesses that lend extensively to small businesses in sectors, such as, construction, and from businesses that act as consultants to a variety of small businesses inside and outside of the lending community. We have concluded that the reforms contained in the Directive do not have a disproportionate impact on small business as such. However, we believe that the new right of withdrawal and the duty to advice may have a significant impact on small retail businesses. As a result we are recommending removing the duty for lenders to advice consumers of appropriate credit products and from the Directive. We are minded to support the right of withdrawal measures but would like a detailed view of the anticipated impact particularly on small businesses. Do you agree with the anticipated impact and can you quantify the costs these proposals would have on your business. ? COMPETITION ASSESSMENT The competition filter test has been carried out and the Directive was found to be unlikely to raise competition concerns. Given that the thrust of the Directive is to harmonise regulation across Europe and make it easier for consumers to purchase consumer credit products from other member states and for firms to operate on a level playing field the Directive is aimed a being pro- competitive. The UK consumer credit market is characterised by a large number of companies offering a wide range of products. Indeed the UK market is generally cited as the most developed in Europe, with no single firms having more than a 10% market share. We do not anticipate that the directive will change the structure of the market since the proposals are unlikely to impact disproportionately on one part of the market. The possible exception to this arises under article 5.1 which, if it does require all firms to make database checks before granting consumer credit, is likely to impose a significant cost on to small firms, such as doorstep lenders, who do not do this at present. Indeed such requirements may lead to some firms exiting the market and will certainly act as a significant barrier to entry to firms wishing to enter in the market. ENFORCEMENT AND SANCTIONS Whilst the Directive is proposing significant reform of the regulatory regime, it does not require any changes to the existing enforcement arrangements which include criminal 85 and civil sanctions, statutory powers available to the court in relation to the enforceability of agreements, and powers bestowed upon the OFT in relation to advertising for which local authority trading standards departments (TSDs) have day to day authority. CONSULTATION Within Government We have consulted with OFT, HM Treasury, The Cabinet Office, DCA, devolved administrations, DFES and FCO. Public Consultation A wider review of consumer credit in the UK, including all aspects of the Consumer Credit Directive were overseen by a board chaired by DTI and comprising representatives from: • • • • • • The Citizens Advice Bureau - to provide an understanding of the difficulties experienced by consumers; The Financing and Leasing Association - who represent a wide range of lenders; The Office of Fair Trading - to provide an overview of the role of the enforcement authorities; An academic Lawyer - to ensure that our work takes account of wider legal implications; The Financial services Authority - to ensure consistency with UK mortgages lending regime HM Treasury - to provide an overview on wider marc economic issues. We have also established a working group in 2003 consisting of a wider number of industry and consumer representatives. The group has been regularly advising on the CCP since its emergence and acted as valuable sounding board. Members of the groups consist of: Barclays plc, Lloyds TSB, Royal Bank of Scotland, British Bankers Association, Financing and Leasing Association, APACS, Experian, British Cheque Cashers Association, Provident, CCTA, Clifford Chance, Council of Mortgages Lenders, Which (formerly Consumer Association) and National Consumer Council. We have also formally consulted on the fundamentals of the Consumer Credit Directive as part of the Consumer Credit White Paper published in December 2003. The consultation has been issued for a minimum of twelve weeks and has been sent to interested parties, as well as being available electronically on the DTI website. We had 106 response to the White Paper. SUMMARY AND RECOMMENDATION We support the aim of the European Commission to establish a common and more competitive European market for consumer credit. This would bring potential long-term benefits for the UK credit market. This should also lead to more choice and competitive prices for consumers. 86 We support: • • • maximum harmonisation for data sharing, pre- contractual and contractual information, calculation of APRs and advertising provisions; the licensing requirements; Overdrafts to be governed by light touch regimes, not going substantially further than current provisions contained in the 1987 Directive. We believe Europe contains vastly different credit markets and Member States need to have the flexibility to introduce specific requirements and consumer protections in a number of areas. Therefore, we support minimum harmonisation in most other areas of the Directive. However, we cannot accept the Directive in its current from as it would impose disproportionate costs on UK business and would lead to significant loss of existing consumer protections. We recommend substantial amendments to the Directive to ensure an appropriate balance between the costs and benefits: • • • • • • the removal off all secured lending from the Directive; the removal of the duty for lenders to advice consumers of appropriate credit products; Credit Unions to be excluded from the scope of the Directive or, if included, only to be governed by minimum information requirements; an exemption for public loans for vocational training and education; More sophisticated requirements for the advertising provisions; removing the concept of responsible lending but ensuring that there are adequate provisions on pre-contractual and contractual information, advertising and the licensing of lenders; Maintain the UK approach to regulating joint and several liability • Q37: Do you agree with the assumptions, figures and impact assessments made in this RIA - if not, please provide as much supporting evidence as possible. 87 Annex I: Detailed breakdown of Benefits and Costs for Option 2 This Annex sets out in more detail firstly the benefits associated with the individual articles of the Directive, followed by a more detailed analysis of potential costs. Secured lending The Directive proposes to regulate credit agreements secured by a mortgage with the purpose of releasing equity for reasons other than for the purchase or transformation of property i.e. second charge mortgages and first charge mortgages to fund the purchase of for example a car or holiday. Given that the public consultation on the scope of mortgage regulation in the UK has been carried out and the FSA has completed a full CBA, there are no obvious additional benefits that could accrue to the UK regime from the Directive’s proposals on secured lending. Overdrafts The Directive proposes that overdrafts will be subject to a slightly more prescriptive regime than currently required which will mean consumers are made aware of their liabilities and charges due more promptly than currently. This should reduce the amount of penalty charges, referral fees and interest that consumers incur through unauthorised borrowing. The Directive also proposes to inform the consumer of the APR by means of a representative Example. Although there are difficulties in calculating an APR for overdrafts, their introduction would provide consumers with a way of comparing the costs of overdrafts to other forms of credit, such as credit cards and therefore make overdrafts a more comparable form of credit. Credit Unions The proposed transparency requirements set out in Article 7 reflect in substance the existing information requirements in the UK. The only substantive difference is the requirement to state the APR which would lead to more transparency for consumers. Advertising The Directive proposes that any advertisements concerning credit agreements shall include standard information through the use of a representative example. There would be likely to be some benefits associated with a unified approach to the advertising of consumer credit across the EU. Lenders would be able to offer their products in other Member States with confidence, knowing that they only need to ensure that they comply with the same requirements imposed in the UK. Consumers would benefit from being given the same information in all Member States. This should make it easier for them to compare products cross border and borrow with more confidence giving them more choice and potentially enabling them to get better rates or more suitable products. Responsible lending The consumer will have to provide up to date information before any “significant” increase in credit and this may restrict borrowers from taking on commitments that cannot be repaid. 88 Pre-contractual and Contractual Information The Directive requires certain specified information to be given in good time before the consumer is bound by a credit agreement or any offer. There would be likely to be some benefits associated with a unified approach to the provision of pre-contractual and contractual information across the EU. Consistency within the EU will reduce the barriers to entering other markets. Lenders would be able to enter the credit markets in other Member States with confidence, knowing that they only need to ensure that they comply with the same requirements imposed in the UK. Consumers would benefit by being confident that they would receive the same information in all Member States and this should allow them to borrow cross border with more confidence. Duty to provide advise The Directive requires that a lender or credit intermediary must establish among the credit products they usually offer or arrange the most appropriate type and total amount of credit for the consumer taking into account the financial situation of the consumer. The article should result in additional information and clarity for consumers. Provided the borrower is not confused between detailed advice given by one lender and a more minimal approach made by a one- product lender, the consumer will be able to make a more informed choice and avoid unsuitable products. This would favour less financially capable consumers and those mislead by a conflict between the marketing of one product and the product that is best for them. Database access The Directive proposes for Member States to ensure that creditors from other Member States have access to their databases under non-discriminatory conditions. Creditors will benefit from having equal access to the data available in other Member States, which should promote cross border lending. There may also be opportunities for the three UK Credit Reference Agencies (CRAs) to set up in Member States which have poorly developed CRAs. The article may facilitate the demand of UK residents for borrowing overseas but this demand may be small because of the currency risks. Because of the growth of buying properties overseas the UK CRAs are already looking at improving their services in this area since foreign loan applications are growing. There may be a competitive benefit in UK in the form of lower prices but the cost saving could be mitigated by the currency risk. Right of withdrawal The Directive proposes to make all consumer credit agreements cancellable, with a 14 day cancellation period. Under current UK law, hire purchase and retail credit agreements, concluded at the premises of the dealer or retailer, are not cancellable. The extension of the right of withdrawal to all consumer credit agreements could be of considerable benefit to the consumer as it would promote transparency and consistency in credit arrangements across the EU. It would give consumers the time to arrange the best credit for their situation and allow them to withdraw from unsuitable agreements. Companies will have less scope to cross subsidise product prices by profit from consumer credit deals – prices of products may actually go up slightly but overall consumers should 89 benefit from better deals on credit. Lack of cross subsidies should make the whole market more transparent for consumers. APR The Directive proposes that the APR must equate, on an annual basis, to the present value of all agreed commitments and requires it to be calculated in accordance with a specified mathematical formula. A harmonised calculation of the APR across the EU and its use in advertising will bring substantial benefits for consumers in terms of transparency. Consumers will be able to compare products from different member States using the APR as a genuine comparator. This should help to promote the Internal Market in consumer credit. Early Repayment According to the Directive, the consumer shall be entitled to discharge fully or partially his obligations under a credit agreement at any time and furthermore entitles him to an equitable reduction in the cost of credit. The provisions on early repayment should benefit consumers who will be able to settle early throughout the EU. Although this will not add to UK provisions, it is important for consumer confidence when shopping cross-border. Joint and Several Liability It is not clear from the current drafting of the proposal whether the UK would be able to maintain its provisions on joint and several liability. If this provision was lost and replaced with ‘linked credit agreements’ it would remove significant protections currently enjoyed by consumers. However, there would be benefits to lenders, who would escape liability for nonprovision of good and services by the supplier. This may result in a reduction in charges to consumers as at present they pay, indirectly for the ‘insurance‘. By removing this provision only consumers who value this type of protection more than the cost of obtaining it will choose to take it. By separating the ‘insurance provision’ aspect from the credit card provision the market for other insurance providers to enter this market will be opened. This could potentially drive down the costs of this insurance provision by increasing competition. It should also make it easier for consumers to understand the true cost of this insurance provision and may encourage them to shop around to get better deals. Default notice and enforceability The Directive states that the creditor must inform a consumer without delay if he suspends the consumer’s drawdown rights, and must justify the decision. As there is no equivalent provision in the CCA this would have the benefit of greater consumer protection in informing consumers when their drawdown rights are being suspended. This will mean that some consumers are able to avoid penalty charges if they exceed their draw down limits. Obligation of credit intermediaries 90 The Directive introduces information requirements for credit intermediaries and brokers and rules on fees. The article is not likely to give rise to considerable benefits to UK consumers since they already have information on the existence and extent of brokers' fees. If this information was to be included in agreements it may assist a small proportion of consumers by increasing transparency and enabling them to better assess the agreement they are entering into – potentially improving competition in the market. Option 2 Costs: Costs The costs discussed are made up of transitional and ongoing costs. In this partial RIA we have not aimed to calculate the net present value of the ongoing costs as at present we have insufficient detail, we just outline the initial costs from the transition associated with the directive. Secured lending The Commission proposal contains an exclusion from the scope of the directive for secured lending for the purchase or transformation of property. However, this is not aligned with the ‘first charge’ definition employed in current UK mortgage regulation, and will therefore have considerable costs. On current drafting, switching mortgages (or re-mortgaging) would be caught by the Directive, as would equity release mortgages. The impact of this must be considered in the context of the size of the UK market. In 2003 there were 2.75 million new mortgages, so very significant numbers of consumers and transactions will be affected. The same year saw £242.6bn in new lending, of which 49.8% was remortgaging (i.e. caught under current CCD draft). 43 As currently drafted, the Directive would potentially have at least four significant adverse effects for the current mortgage regime: 1. costs to firms in meeting new Directive standards; 2. wasted costs where national standards are removed or diluted; 3. reduced consumer protection in areas such as advertising; the standard of advice; cold-calling; disclosure; and the treatment of arrears cases; and 4. an increase in the number of regulated firms with associated transitional and ongoing monitoring and compliance costs. Costs to firms in meeting new Directive standards The CCD standards are not the same as the UK regime. Several provisions of the CCD impose requirements without parallel in the UK regime or set standards at a level exceeding the current rules. Firms will therefore have to meet the costs of these new requirements, without any evidence that the measures will be a cost-effective means of delivering the intended benefits. In several cases, the CCD adopts an approach which the UK has previously considered and rejected as being disproportionate. One example of this is the Article 6.4 obligation for advice to form a part of all sales. 43 Published CML data 91 The Directive in its current form would impose significant costs for the UK mortgage market in the areas of advertising, the duty to advice, early repayment and fee restrictions on brokers (see below). The UK introduced statutory regulation of first charge residential mortgages under the FSA on 31 October 2004. The FSA's CBA of the UK mortgage rules identified a one-off cost for firms of £136m – mainly comprising the costs of new systems, training and competence and management/supervision time. Lenders have recently said they believe that the actual cost was more than this. Where the Directive means the withdrawal of requirements in the current UK regime, these costs will have been wasted. Furthermore, any additional changes resulting from the Directive could result in cost for business potentially reaching same magnitude to those incurred as result of the domestic reform. Reduced consumer protection Where a maximum harmonisation CCD imposes lower standards, the major cost impact is a reduction in consumer protection. There are many examples where this will be the case, for example on charges, on-going statements and the fair treatment of borrowers in arrears. Wasted costs where national standards are removed or diluted An increase in the number of regulated firms In some regards, the scope of the UK regime is narrower than that proposed in the Directive. Local authorities and Registered Social Landlords (RSLs) are exempt from the Consumer Credit Act 1974, as are professional firms such as lawyers. Similarly, introducers are exempt, along with third parties such as mortgage packagers. For all of these, there will be costs if the Directive means that they become regulated – without any assessment about the relevant benefits or the risks presented by such bodies remaining beyond the scope. There is a real danger that the proposed reforms may have an adverse affect on the UK mortgage market and could lead to higher mortgage cost, whilst at the same time reducing consumer protection in this area. This has the potential to have significant effects on the UK economy. 44 Overdrafts The impact of the Directive is that the lender will be required to provide the borrower with additional information about an average APR and the charges that apply to the overdraft facility. In the UK it has been generally accepted that an APR is not an appropriate comparator for overdrafts. Imposing this extra requirement will incur additional costs on lenders and may confuse borrowers. Formalising the overdraft before the facility is granted will add to current procedures. Some lenders mark a limit on an account without telling the customer, this practice may have to stop, leading to more cheques being bounced and more overdraft facilities 44 OXERA estimated the effect on GDP of the articles 6, 10,15,34 and 9 of the Directive as between 0.1% and -0.2%. See ‘Assessment of the economic Impact of the proposed EC Consumer Credit Directive’, July 2003. This is based on the assumptions that interest charges on secured and unsecured debt increase and on the percentage of mortgages likely to be affected by the Directive. 92 having to be agreed upfront when the customer may not actually need the facility. This will inconvenience consumers who require overdraft access at short notice clearly leading to consumer detriment – though the magnitude of this is difficult to quantify. The requirement to advise the amount of the credit “before the agreement is concluded” means that general information about overdrafts in a brochure will not be enough to comply because the actual limit will not be known and much will depend on what sort of representative information will be required. Reducing the formalisation period for tacit overdrafts from 90 days to 30 days may increase the total amount of formal contracts that the lender has to process. For some of the users of tacit overdrafts these formal agreements may not apply – as they pay off the excess within a short period. Credit Unions The provisions relating to Credit Unions largely reflect the existing information requirements in the UK, and so costs would be limited and would mainly relate to implementing the new requirements (transitional costs). For Credit Unions in England and Wales and Scotland, the FSA rules would need to be extended to implement the limited disclosure requirements as set out in Article 7 of the Directive. The Department of Enterprise, Trade and Investment in Northern Ireland regulates Credit Unions in Northern Ireland and their rules will need to be reviewed in light of the Directive. Advertising The Consumer Credit (Advertisements) Regulations 2004, which came into force on 31st October 2004, introduced a new regime for the advertising of consumer credit in the UK. On the face of it, Article 4 requires advertisers to disclose very similar information to that required by the Regulations. It also stresses the importance of clarity and prominence as over-arching principles in advertisements. However, there are significant differences in the ways in which these elements are made to interact in Article 4. There are clearly direct costs associated with moving from one regime to the other. These, however, are likely to be in the nature of one-off transitional costs associated with advertisers and enforcers coming to terms with the new legal requirements and updating their advertising material. In moving from the 1989 Regulations to the 2004 Regulations, we estimated that these costs would amount to around £40 million. We have no reason to assume that the amount would be any different in moving from the 2004 Regulations to the Article 4 regime. There would also, however, be some costs associated with the loss of the benefits expected from the simplification of the regime represented by the 2004 Regulations. We had estimated that ongoing compliance costs would have been reduced by around £1 million per annum as a result of the simplification of the domestic regime. We also estimated savings for consumers in the region of £41 million per annum as a result of clearer information. A move to Article 4 could not be guaranteed to retain all or some these savings as the clarity of information presented to consumers is likely to be lower under the European Directive than with the Domestic legislation. Due to the differences with the 2004 Domestic regulations there are likely to be two sets of changes required to all advertisements in a short time as companies switch first to the 93 domestic regime and then to the European regime. This will confuse consumers and is likely to undermine the clarity that the advertising regulations seek to achieve. There are also specific cost the UK mortgage market as the Directive requires representative information to appear in adverts, something that is not a feature of current FSA regime and would therefore present an additional cost. Additional costs would also accrue from scope disclosure in broker advertising. However if these changes are introduced gradually over a period the costs can be minimised since changes can be made as part of ongoing advertising costs. Responsible lending The article on responsible lending requires the creditor to update the financial information at his disposal and to assess the consumer’s creditworthiness before any significant increase in the total amount of credit. If this means that a lender will have to approach a customer to find out latest information regarding their salary and commitments then this will add considerably to costs of setting up an agreement - costs which are likely to be passed on to the consumer. This will also delay on-going review of customer’s credit limits. Pre-contractual Information Much of the information specified in the CCD is already required under our Consumer Credit (Disclosure of Information) Regulations 2004 that come into force on 31 May 2005, and so we do not anticipate this article having much additional cost. Transitional costs will be manageable if the legislation is phased in. UK lenders may complain that from 2005 until the new proposal comes into force they had to produce special pre contract information but thereafter they could use the draft agreement to fit the bill. Training costs should not be too high since the CCD merely tweaks what we will already have introduced in May 2005. In terms of additional procedures this does not seem to add any additional costs over those that will be incurred by lenders when complying with the new Form and Content Regulations. However, there will be costs in terms of benefits forgone from allowing pre-contractual information to be fulfilled by providing a copy of the contract. Duty to provide advice As drafted, the duty to provide advice will impose considerable additional costs on industry and consumers. The requirement to establish the most appropriate type of credit agreement and total amount of credit taking into account the financial situation of the consumer, the advantages and disadvantages associated with the product proposed and the purpose of the credit will skew competition toward the one product lender (who would not be required to provide advice on the other products he offers) a competitive advantage. The provision of such advice might also affect the use of the Internet in the credit market depending on the ability of Internet providers to satisfy the advice criteria online. This might shift demand to telesales and face-to-face transactions at an increased cost to the consumer. Lenders will also incur transitional costs as they would need to invest in the resources that would enable them to provide the required advice to customers. This would involve 94 increased training and contract design costs of an estimated £23 million 45 to the industry, a proportion of which would be ongoing. There would also be an on going cost associated with the increased time sales staff would need to spend discussing products with consumers e.g. assuming an increased selling time of 20min and sales time costs of £9 per hour this would cost £3 for each advice discussion. These costs are likely to be passed on to the consumer in terms of higher charges. There may also be potential legal and compensatory costs to lenders as a result of providing the wrong advice and lenders may also need to keep a record of the advice given to consumers. This would cost additional time and resources, which are likely to be passed onto consumers in terms of higher prices. Consumers who do not require advice would be obliged to incur the time costs associated with receiving advice even though they do not need it. Lenders may also be inclined to narrow the range of products they offer to simplify the advice process. Reducing the choice available to consumers. A particular example of the costs likely to arise is the UK mortgage market. If we assume that each time a consumer seeks advice this takes up 30mins of a sales assistants time and 2.75m mortgages are issued each year with consumers seeking an average of 2 quotes/advice sessions before agreeing to a mortgage total costs in time alone of providing the increased mortgage advice are likely to total in excess of £27m. Added to this are staff training costs which assuming industry wide 5,000 staff need to be trained at a cost of £500 total training costs will be over £2.5 m. On top of this, there will be costs to the consumers in terms of time. Database access UK CRAs (credit reference agencies) would not have problems complying with the provisions of the Directive to provide data on UK residents to overseas EU lenders provided the latter gave information back to the CRA database. The overseas EU lender would need to register with the CRA. The CRAs would have to amend their database to allow for the feedback of information on the performance of UK creditors abroad. The costs associated with this would be negligible. In the UK the consumer knows the result of the database consultation as the lender explains when the loan is declined the main reason why it has been turned down. As this is done without charge, it will not impose an extra cost. However, if it is CRA provided information that is the issue, the lender has to explain how a file copy can be ordered from the CRA for £2. The lender cannot provide the CRA file since they do not have it. As the charge of £2 is already less than the cost of supplying the file, providing it without charge will impose a cost on CRAs. Contractual Information On the face of it, Article 10 requires much the same information to be included in the agreement as will be required from 31st May 2005 under the Consumer Credit 45 This figure assumes a one off administration charge and staff training costs that affect all lenders and financial intermediaries in the industry. It is consistent with the figures used in the RIA on the domestic Consumer Credit Bill. 95 (Agreements) (Amendment) Regulations 2004. However, any change, no matter how minor, would require lenders to redesign their paperwork and their systems, and this will entail considerable expense – albeit of a one-off nature – across the credit industry. The same consideration of costs arose when the move was made from the 1983 Agreements Regulations to the new domestic regime. Including the new domestic provisions on the provision of pre-contract information (Articles 5.2 and 5.3 refer), oneoff costs to business to redraft and reprint agreements were estimated at around £163 million. We did not anticipate any ongoing costs once the regulatory change had been made. We do not see any reason to believe that the costs would be radically different in switching to the Article 5 / 10 regime. There may, however, be opportunity costs. The 2004 Regulations were designed to increase transparency, make consumers better informed, and therefore help them to save money. Were there to be any material differences in the requirements that eventually emerge in the Directive, we could not be certain that these would deliver these same benefits. Right of withdrawal Under the proposal, the consumer shall have a fourteen-day cooling off period within which they can cancel their acceptance of a credit agreement. However, in certain circumstances this may lead to lenders withholding the loan money/product until the 14 days has passed. This may encourage some consumers would be encouraged to purchase on more expensive forms of credit which avoid the ‘cooling off’ period i.e. credit cards and overdrafts. The proposal may have a particular impact on the hire purchase industry where the goods and credit are linked. The only contract with the consumer is for the hire of goods and if that is regarded as a credit agreement (see earlier remarks) then in the event the agreement is cancelled by the consumer the finance company hiring out the goods will have no option but to take back the goods and would consequently be liable for any depreciation in the value of the goods supplied. APR If the article results in any change from the current APR calculation there will be significant transitional costs. This will consist of costs associated with training staff, legal and managerial input and issuing new documentation. Consumers are likely to be confused by the changes in the short term and problems will arise unless the changeover from one method of calculation to another happens simultaneously across the industry - otherwise during the transition period consumers will have difficulty comparing products. This has scope to lead to significant consumer detriment. The change in the way that the APR is calculated for advertisements will have a cost in terms of revising all the credit adverts. However, once this transition has taken place, there will be no ongoing costs. 96 Early Repayment The costs of the early repayment provisions should be minimal as they are in line with the changes introduced in the UK under the recent Regulations. However, the Directive prohibits early repayment charges on borrowing rates fixed for less than one year. This would catch certain fixed rate products in the UK and the additional burden could see an increase in the price of such products for all borrowers which would be unfair on those who normally take the full term to repay. Furthermore, for loans under one year UK short term lenders may have problems if they cannot even move the settlement date 28 days forward as they can still do under our 31 May 2005 changes. The money they now make in this area is based on the payment date being set 28 days ahead and payment being made 28 days ahead. If consumers could demand no indemnity, they would have to pay immediately so the lender’s loss would be limited to the forgone small profit portion of the interest payments due in the next 28 days. Joint and Several Liability It is not clear from the current drafting of the proposal whether the UK would be able to maintain its provisions on joint and several liability. If this provision was lost and replaced with ‘linked credit agreements’ it would have implications for credit cards in the UK market. Consumers may lose out since they would lose the ability to seek redress from lenders for losses suffered as a result of failed suppliers or faulty or undelivered products. It is difficult to quantify the cost of Section 75 to the industry, not least because the internal industry procedures for dealing with disputed transactions (the chargeback processes) mean that the industry tends to absorb the cost of transactions that might ultimately have given rise to Section 75 being invoked. Nevertheless the value of this ‘free insurance’ is likely to be worth several millions to consumers each year. However, the net loss of ‘free insurance’ to consumers is likely to be very low since consumers are already in effect paying for this insurance though higher credit card charges. There are also potential costs to lenders as a result of loss of business as consumers reduce their use of credit cards when they become aware that the section 75 advantages are not available as credit cards lose this “competitive advantage” over other forms of borrowing. There may also be an adverse impact on overall retail sales as customers may not have confidence to make purchases. This will be the case in an electronic sales environment. It is probably true to say that a good proportion of consumers do not have a clear understanding of the rights in respect of Section 75 but because of the provisions many card issuers make it clear that consumers are protected from fraud and from fraudulent transactions on line. There is no doubt that awareness of the provisions of Section 75 is increasing amongst consumers. (Some card providers may choose to offer this sort of insurance product anyway with consumers paying a premium for it as a way of distinguishing their product). Default notice and enforceability The CCD states that the creditor must inform a consumer without delay if he suspends the consumer’s drawdown rights, and must justify the decision. As there is no equivalent 97 provision in the CCA this would lead to transitional costs for industry of producing a notice to suspend consumer’s drawdown rights. Based on transitional cost incurred by industry to comply with updating information requirements under UK reform we estimate that the cost of developing post-contract information documentation i.e. arrears notices and annual statements to be £1000 for small firms, £5000 for medium sized business and £20K for large business. These are based on 5000 lenders of which 1,100 are small business, 3100 medium size and 800 large. This means cost of £1.1m for small business, £31.5 m for all other businesses. Obligation of credit intermediaries The article will place additional requirements on credit brokers to indicate if they work exclusively with one or more creditors in advertising and documentation intended for the client. The costs will be similar to those set out under Article 4 on advertising. There will be transitional costs for brokers in producing advertising material complying with new requirements. This can be significantly reduced if a time is allowed for this transition as the updates to advertising material can take place as they would normally. 98 Annex 1: Unofficial consolidated text UNOFFICIAL CONSOLIDATED TEXT of the Amended Proposal for a DIRECTIVE on the harmonisation of the laws, regulations and administrative provisions of the Member States concerning credit for consumers repealing Directive 87/102/EC and modifying Directive 93/13/EC This text is based on COM(2004) 747 final presented by the Commission on 28 October 2004 PLEASE NOTE: The amended proposal on which this is based takes the form of comments on the Parliamentary amendments rather than a revised text of the Directive. It is ambiguous and requires clarification. On the basis of the Commission’s proposal we have put together this unofficial consolidated version. This text is only intended as a rough guide to the revised proposal for the reader and should not be regarded as an official Commission text or necessarily reflecting every change that is intended. 99 CHAPTER 1: AIM, DEFINITIONS AND SCOPE Article 1 Aim The aim of this Directive is to harmonise the laws, regulations and administrative procedures of the Member States concerning agreements covering credit granted to consumers and surety agreements entered into by consumers. Article 2 Definitions For the purpose of this Directive: a) b) c) “consumer” means a natural person who, in transactions covered by this Directive, is acting for purposes which can be regarded as outside his trade or profession; “creditor” means a natural or legal person who grants or promises to grant credit in the course of his trade, business or profession; “credit agreement” means an agreement whereby a creditor grants or promises to grant to a consumer , for renumeration, credit in the form of a deferred payment, loan or other similar financial accommodation. Agreements for the provision on a continuing basis of services or a supply of goods of the same kind and in the same quantity, where the consumer pays for them for the duration of their provision by means of instalments, as well as agreements for the provision on a continuing basis of services (private or public), where the consumer has the right to pay for them for the duration of their provision by means of instalments, are not deemed to be credit agreements for the purposes of this Directive; “credit intermediary” means a natural or legal person who, for a fee, habitually acts as an intermediary by presenting or offering credit agreements, undertaking other preparatory work for such agreements, or concluding such agreements; the fee may take the form of cash or any other agreed form of financial consideration; “acting as a credit intermediary” means offering or presenting credit agreements, undertaking other preparatory work for such agreements, or concluding credit agreements. “surety agreement” means an agreement linked to a credit agreement under which a guarantor guarantees the fulfilment of a credit agreement covered by this directive concluded with a consumer; “guarantor” means a consumer concluding a surety agreement in connection with a credit agreement concluded by a third party as a consumer; “total cost of credit to the consumer” means all the costs, including borrowing interest, commissions, and any kind of fees which the consumer has to pay in connection with the credit agreement in conformity with the terms thereof, and which are known to the creditor. Costs relating to ancillary services relating to the credit agreement, in particular insurance premiums, are included if the service is compulsory in order to obtain the credit or the advertised rate, and is concluded with the creditor or with a third party, if the creditor, or, where applicable, the credit intermediary have concluded it on behalf of this third party or have presented the offer or the service as such to the consumer. Costs payable by the consumer on conclusion of the credit 100 d) da) e) f) g) agreement to persons other than the creditor or the credit intermediary, in particular a notary, tax authorities, registrar of mortgages, and any costs in general imposed by the authority responsible for registration and sureties are excluded h) k) l) m) n) o) “annual percentage rate of charge” means the total cost of the credit to the consumer expressed as an annual percentage of the total amount of credit granted; “borrowing rate” means the interest rate expressed as a periodic percentage applied for a given period to the amount of credit drawn down; “residual value” means the purchase price of the financed goods applicable at the time when the purchase option or the property transfer option is exercised; “drawdown” means an amount of credit made available to the consumer in the form of a deferred payment, loan or other similar financial accommodation; “total amount of credit” means the ceiling or the sum of all drawdowns that are likely to be agreed; “durable medium” means any instrument which enables the consumer to store information addressed personally to him in a way which makes it accessible for future reference for a period of time adequate for the purposes of the information and which allows the unchanged reproduction of the information stored; “linked credit agreement” means an agreement where the credit in question serves exclusively to finance an agreement concerning the supply of goods or the provision of a service and the two agreements form from an objective point of view a commercial unit. It should be assumed that a commercial unit is involved where the supplier or service provider himself finances the credit for the consumer or, if it is financed by a third party, if the creditor uses the services of the supplier or service provider in connection with the conclusion, or preparation, of the credit agreement, or if the credit agreement makes reference to the specific goods or services to be financed with the credit”. q) Article 3 Scope 1. 2. This Directive applies to credit agreements and surety agreements. This Directive shall not apply to the following credit agreements and, where applicable, any corresponding surety agreements: a) credit agreements the aim of which is to grant credit for the purchase or transformation of private immovable property that the consumer owns or is seeking to acquire and which are secured either by a mortgage on immovable property or by a surety commonly used in a Member State for this purpose; hiring agreements, except where they provide for the title to pass to the hirer eventually; leasing agreement which do not create any obligation to purchase the object of the agreement; b) ba) c) credit agreements under the terms of which the consumer is required to repay the credit within a period not exceeding three months, without the payment of interest or any other charges; d) credit agreements which meet one of the following conditions: 101 i) ii) they are granted outside the sphere of any commercial or professional activity (private credit agreements), they are granted by an employer to his employees as a secondary activity free of interest or at annual percentage rates of charge lower than those prevailing on the market, they are not offered to the public generally; iii) e) credit agreements concluded with investment firms within the meaning of Article 1 (2) of Council Directive 93/22/EEC 46 for the purposes of allowing an investor to carry out a transaction relating to one or more of the instruments listed in Section B of the Annex to that Directive, where the firm granting the credit is involved in such transaction 47 . surety agreements guaranteeing business loans; agreements which are the outcome of a settlement reached in court or before another statutory authority; credit agreements whose conclusion is accompanied by the consumer depositing a security in the creditor’s safe-keeping, where the surety deposited with the creditor is sufficient in itself to pay off the loan [credit concluded with pawn-shops]; credit agreements over EURO 100,000 [loans over Euro 100,000]; credit agreements under which the consumer is required to repay the credit by a maximum number of four payments within a period not exceeding 12 months; start-up or personal development loans granted by public institutions or institutions officially authorised to do so; ea) eb) ec) ed) ef) eg) 3. This Directive shall not apply to credit agreements on the basis of which a credit or financial institution grants credit in the form of advances on current accounts or debit accounts, where the total amount has to be repaid within three months or on demand; the provisions of Article 6 (new) and Article 21 shall, however, apply to such credit agreements; The provisions of Article 7 (new) will apply to the following specific credit agreements: – smaller loans (below €300); – loans “granted to a restricted public, at a lower interest rate than usually proposed on the market or free of interest, and when the creditor is fulfilling a statutory duty with a general interest purpose”, – loans granted by certain non-profit associations such as genuine credit unions; and – credit agreements aiming at refinancing the existing debts of a consumer in order to avoid legal proceedings and where the terms do not have the consequence of putting the consumer in a worse situation than before the new agreement. 4. 46 47 OJ L 141, 11.6.1993, p.27. OJ L 141, 11.6.1993, p.27. 102 103 CHAPTER II: INFORMATION AND PRACTICES PRELIMINARY TO THE FORMATION OF THE AGREEMENT Article 4 Standard Information 1. Any advertising concerning credit agreements shall include standard information which includes information on the cost of credit in accordance with this Article. The standard information shall include, in the following order, and in a clear, concise and prominent way through a representative example, - the total amount of credit, - the annual percentage rate of charge, - the duration of the credit agreement, - the number and amount of monthly payments, and - any kind of fees in connection with the credit agreement in conformity with the terms thereof and which are known to the creditor. If an ancillary service relating to the credit agreement, in particular an insurance, is compulsory to obtain the credit or the advertised rate, and its cost cannot be determined in advance, the obligation to take out this service shall also be mentioned in a clear, concise and eye-catching manner, together with the annual percentage rate of charge. If these credit terms are not generally available for every borrower, the annual percentage rate of charge must be stated by means of at least two representative examples. Where a lower interest rate is offered for a limited duration at the beginning of the credit agreement, the advertisement shall contain the annual percentage rate calculated on the whole duration of the credit agreement. 2. The provisions of this Article are without prejudice to Directive […/…/EC of …/…/… (the Unfair Commercial Practices Directive)]” Article 6 Pre-contractual Information 1. The creditor and, where applicable, the credit intermediary shall adhere to the principle of responsible lending. Responsible lending includes the requirement for the creditor and, where applicable, the credit intermediary, to comply with their obligations as regarding the provision of pre-contractual information and the requirement for the creditor to assess the consumer’s creditworthiness on the basis of the information provided by the latter, and, where appropriate, on the basis of a consultation of the relevant database. 104 In cases where the agreement allows the parties to amend the total amount of credit after the date of conclusion of the agreement, the creditor is required to update the financial information at his disposal and to assess the consumer’s creditworthiness before any significant increase in the total amount of credit. 2. In good time before the consumer is bound by a credit agreement or any offer, the creditor and, where applicable, the credit intermediary shall provide, on paper or on another durable medium, the necessary and essential information needed for the conclusion of the credit agreement under consideration. The information shall refer to: (a) (b) (c) the sureties and insurance required; the duration of the credit agreement; the amount, number and frequency of payments to be made, where possible set out in a payment schedule; where applicable, the costs of maintaining an account recording both payment transactions and credit transactions, the costs of using a card or another means of payment for both payment transactions and draw downs, and the costs relating to payment transactions in general the total amount of credit and the conditions governing the drawdown of the credit; where applicable, the borrowing rate, the conditions governing the application of this rate and any index, where available, or reference rate applicable to the initial borrowing rate, as well as the periods, conditions and procedures for varying the borrowing rate; the annual percentage rate of charge and the total cost of credit, by means of a representative example. All the financial data and assumptions used for calculating the said rate shall be mentioned; Costs payable by the consumer on conclusion of the credit agreement to persons other than the creditor or the credit intermediary, in particular a notary, tax authorities, registrar of mortgages, and any costs in general imposed by the authority responsible for registration and sureties, shall be mentioned. If an ancillary service relating to the credit agreement, in particular an insurance, is compulsory to obtain the credit or the advertised rate, and its cost cannot be determined in advance, the obligation to take out this service shall also be mentioned in a clear, concise and eye-catching manner; the existence of the right of withdrawal, the period during which that right of withdrawal may be exercised, and the procedure for the exercise of that right the right to be informed of the result of a database consultation for the assessment of the creditworthiness; the right of early repayment, and, where applicable, the costs arising there from, indicating the amount or the calculation method; 105 (d) (e) (f) (g) (h) (i) (j) (k) (l) the interests in the case of overdue payments as applicable at the time when the information according to this provision is given and the arrangements for their adjustment, and the charges for defaulting; In the cases of voice telephony communications as referred to in Article 3 (3) of Directive 2002/65/EC, this information must include in addition to the information required by this provision at least the items referred to in points c), e), and g) of this paragraph. The duty under this paragraph to provide information may also be discharged by supplying a draft agreement including the information in accordance with Article 10. 3. In the case of a contract where payments made by the consumer do not give rise to an immediate corresponding amortisation of the total amount of credit, but are used to constitute capital during periods and under conditions laid down in the credit agreement or in the ancillary agreement, the information given according to this provision must include a clear and concise statement that such contracts do not provide for a guarantee of repayment of the total amount of credit drawn down, unless such a guarantee is given. The creditor or, where applicable, the credit intermediary shall seek to establish, among the credit agreements they usually offer or arrange, the most appropriate type and total amount of credit taking into account the financial situation of the consumer, the advantages and disadvantages associated with the product proposed, and the purpose of the credit. 4. Article 6 (new) Information requirements for overdrafts Where a credit agreement covers credit in the form of an advance on a current account or debit account within the meaning of Article 3 (3), the consumer shall be informed before the agreement is concluded of: – the total amount of credit; – the borrowing rate; – the annual percentage rate of charge by means of a representative example mentioning all the financial data and assumptions used for calculating the said rate; – the charges applicable from the time the agreement is concluded, and the conditions under which those charges may be amended; and – the conditions and procedure for terminating the agreement. 106 Article 7 (new) Information requirements for specific agreements In good time before a consumer is bound by a credit agreement or any offer concerning a credit agreement within the meaning of Article 3 (4), the creditor and, where applicable, the credit intermediary shall provide, on paper or on another durable medium, the following information: (a) the total amount of credit; (b) the borrowing rate; (c) the annual percentage rate of charge, by means of a representative example mentioning all the financial data and assumptions used for calculating the said rate; (d) the duration of the credit agreement; and (e) the amount, number and frequency of payments to be made. 107 CHAPTER III: DATABASE ACCESS Article 8 Databases 1. In the case of cross-border credit, each Member State shall ensure access for creditors from other Member States to databases in that Member State under non-discriminatory conditions. The consumer and the guarantor shall, if they so request, be informed of the result of any consultation immediately and without charge. 2. 108 CHAPTER IV: FORMATION OF CREDIT AND SURETY AGREEMENTS Article 10 Contractual Information 1. Credit agreements and surety agreements shall be drawn up on paper or on another durable medium. All the contracting parties shall receive a copy of the credit agreement. The guarantor shall receive a copy of the surety agreement. Agreements shall contain information regarding access to out-of-court complaint procedures and shall specify the formalities to be followed when a creditor or credit intermediary makes use of such procedures. 2. The credit agreement shall include, in a clear and concise manner: a) b) the names and addresses of the contracting parties as well as, if applicable, the name and address of the credit intermediary involved; the sureties and insurance required; c) the duration of the credit agreement; d) the amount, number and frequency of payments to be made; e) where capital amortisation of a credit agreement with fixed duration and rate is involved, a statement of account in the form of an amortisation table, the payments owing, and the periods and conditions relating to the payment of these amounts; f) if charges and interest are to be paid without capital amortisation, a statement showing the periods and conditions for the payment of the borrowing interest and of the associated recurrent and non-recurrent charges; g) a statement of costs, indicating their purpose and amounts, which are not included in the calculation of the annual percentage rate of charge but which are known to the creditor or the credit intermediary and are to be paid by the consumer, namely the interest in case of overdue payments as applicable at the time of conclusion of the agreement and the arrangements for their adjustment penalties, charges or interests on arrears relating to an overrunning of the total amount of credit, and the charges for defaulting; h) the total amount of credit and the conditions governing the drawdown of the credit; i) where applicable, the goods or services being financed; j) where applicable, the borrowing rate, the conditions governing the application of this rate and any index, where available, or reference rate applicable to the initial borrowing rate, as well as the periods, conditions and procedures for varying the borrowing rate; k) the total cost of credit to the consumer and the annual percentage rate of charge, calculated at the time the credit agreement is concluded, on the basis of all the financial data and assumptions applicable to the agreement; l) the existence of the right of withdrawal, the period during which that right of withdrawal may be exercised, and the procedure to exercise that right. 109 m) the right of early repayment, the procedure for early repayment, and, where applicable, the costs arising there from, indicating the amount or the calculation method: n) the right to be informed of the result of database consultation for assessment of creditworthiness according to Article 8(2); o) p) the procedure to be followed to exercise the right of termination of the credit agreement; information concerning the rights resulting from Article 15 as well as the conditions for the exercise of these rights 3. The surety agreement shall state the maximum amount guaranteed, as well as the charges for defaulting to be applied in accordance with the procedure referred to in paragraph 2 (g). Article 11 Right of withdrawal 1. The Member States shall ensure that the consumer shall have a period of fourteen calendar days to withdraw from the contract without penalty and without giving any reason. This period for withdrawal shall begin: — either from the day of the conclusion of the of the credit agreement, or — from the day on which the consumer receives the contractual terms and conditions and the information in accordance with Article 10 (2), if that is later than the date referred to in the first indent. 2. If the consumer exercises his right of withdrawal he shall, before the expiry of the relevant deadline, notify this to the creditor following the practical instructions given to him in accordance with Article 10 (2) . The deadline shall be deemed to have been observed if the notification, if it is on paper or on another durable medium available and accessible to the recipient, is dispatched before the deadline expires. Following the exercise of the right of withdrawal the creditor shall notify the consumer, in writing or another durable medium, of the sums of money to be repaid including the interest due during the period for which the credit was drawndown. The interest due shall be calculated on the agreed annual percentage rate. No other indemnity may be claimed in connection with exercising the right of withdrawal. The consumer shall pay to the creditor those sums of money notified to him under this paragraph. Paragraphs 1, 2 and 3 shall not apply to credit agreements concluded through services of an official, provided that the official confirms that the consumer is guaranteed the rights under Article 6(2) and 10(2) nor to credit agreements within the scope of the Directive which are secured either by a mortgage on immovable property or by a surety commonly used in a Member State for this purpose or credit agreements cancelled under: 110 3. 4. a) Article 6 of Directive ../2002/EC [on the distance marketing of financial services to consumers and amending Council Directives 90/619/EC, 97/7/EC and 98/27/EC]; b) Article 6 (4) of Directive 97/7/EC of the European Parliament and of the Council 48 ; c) Article 7 of Directive 94/47/EC of the European Parliament and of the Council 49 . 48 49 OJ L 144, 4.6.1997, p.19. OJ L 280, 29.10.1994, p.83. 111 CHAPTER V – ANNUAL PERCENTAGE RATE OF CHARGE AND BORROWING RATE Article 12 Annual percentage rate of charge 1. The annual percentage rate of charge, which equates, on an annual basis, the present value of all commitments (drawdowns, repayments and charges), future or existing, agreed by the creditor and the borrower, shall be calculated in accordance with the mathematical formula set out in Annex I. The annual percentage rate of charge shall be calculated in a mathematically correct way using a formula in which the capital growth factor, taking into account all payment flows deriving from credit and linked transactions, is denoted by an exponent expressed in days divided by 365.325. The method is explained in Annex I. Examples of the method of calculation are given in Annex II, by way of illustration. 2. For the purpose of calculating the annual percentage rate of charge, the total cost of the credit to the consumer shall be determined, with the exception of charges payable by the consumer for non-compliance with any of his commitments laid down in the credit agreement and charges other than the purchase price which, for purchases of goods or services, he is obliged to pay whether the transaction is paid in cash or on credit. The costs of maintaining the account recording both payment transactions and credit transactions, the costs of using a card or another means of payment for both payment transactions and drawdowns, and the costs relating to payment transactions in general shall be regarded as credit costs unless they are optional and they have been clearly and separately shown in the credit agreement or in any other agreement concluded with the consumer. Costs relating to insurance premiums shall be included in the total cost of the credit if the insurance is compulsory in order to obtain the credit. 3. The calculation of the annual percentage rate of charge shall be based on the assumption that the credit contract will remain valid for the period agreed and the creditor and the consumer will fulfil their obligations under the terms and by the dates agreed In the case of credit agreements containing clauses allowing variations in the borrowing rate contained in the annual percentage rate of charge but unquantifiable at the time of calculation, the annual percentage rate of charge shall be calculated on the assumption that the borrowing rate and other charges will remain fixed in relation to the initial level and will remain applicable until the end of the credit agreement. Where necessary, the following assumptions may be adopted in calculating the annual percentage rate of charge: a) if a credit agreement gives the consumer freedom of drawdown, the total amount of credit shall deemed to be drawn down immediately and in full; b) if there is no fixed timetable for repayment, and one cannot be deduced from the terms of the agreement and the means for repaying the credit granted, the duration of the credit shall be deemed to be one year; ba) for open-end credit agreements, a constant capital balance should be assumed; 4. 5. 112 c) unless otherwise specified, where the agreement provides for more than one repayment date, the credit will be made available and the repayments made on the earliest date provided for in the agreement; 6. Where a credit agreement is drawn up in the form of a hire agreement with an option to purchase and the agreement provides for a number of dates on which the purchase option may be exercised, the annual percentage rate of charge shall be calculated for each of the these dates. Where the residual value cannot be determined, the goods hired shall be subject to linear amortisation that makes its value equal to zero at the end of the normal hire period laid down in the credit agreement. Article 14 Borrowing rate 1. 2. 3. The borrowing rate may be fixed or variable Where one or a number of fixed borrowing rates have been established, they shall apply for the duration of the period specified in the credit agreement. A variable borrowing rate may vary either after agreed periods provided for in the credit agreement and in line with the agreed index or reference rate, or in accordance with other arrangements agreed on by the parties. The consumer shall be informed of any change to the borrowing rate, on paper or on another durable medium. This information must include the new annual percentage rate of charge, and, where applicable, the new amortisation table. The calculation of the new annual percentage rate of charge shall be based on Article 12 (3). 4. 113 CHAPTER VI – UNFAIR TERMS Article 15 Unfair terms The Annex of Council Directive 93/13/EEC of 5 April 1993 on unfair terms in consumer contracts7 shall be modified as follows: 3. Terms of a consumer credit agreement (as defined in Article 2 c) of Directive…/…/EC of the European Parliament and the Council on the harmonization of the laws, regulations and administrative provisions of the Member States concerning credit for consumers) which have the object or effect of: a) imposing on the consumer, as a condition for a drawdown, a requirement to leave as surety, in full or in part, the sums borrowed or granted, or to use them, in full or in part, to constitute a deposit or purchase securities or other financial instruments, unless the consumer obtains at least the same rate for such deposit, purchase or surety as the agreed annual percentage rate of charge; b) oblige the consumer, when concluding a credit agreement, to enter into another contract with the creditor, credit intermediary or a third party designated by them, unless the costs thereof are included in the total cost of the credit; 114 CHAPTER VII – PERFORMANCE OF A CREDIT AGREEMENT Article 16 Early Repayment 1. The consumer shall be entitled to discharge fully or partially his obligations under a credit agreement at any time before expiry of the period fixed in the credit agreement. In such cases, he shall be entitled to an equitable reduction in the cost of credit. Any indemnity claimed by the creditor for early repayment shall be fair and objective and shall be calculated on the basis of actuarial principles. No indemnity shall be claimed: a) for credit agreements where the period used to fix the borrowing rate is less than one year; b) if repayment has been made under an insurance contract intended to provide a conventional credit repayment guarantee; 2. Article 17 Assignment of rights Where the creditor's rights under a credit agreement or surety agreement are assigned to a third party, the consumer and, where applicable, the guarantor, shall be entitled to plead against the assignee of the creditor's rights under that agreement any defence which was available to him against the original creditor, including set-off where the latter is permitted in the Member State concerned. The consumer must be informed that the contract has been assigned to a third party. Article 18 Ban on the use of bills of exchange and other securities The creditor or assignee of the creditor's rights under a credit agreement or surety agreement shall not require or invite the consumer or guarantor to guarantee payment of their commitments under that agreement by means of a bill of exchange or promissory note. Moreover, the consumer or guarantor shall not be required to sign a cheque guaranteeing repayment, in full or in part, of the amount due. Article 19 Linked Transactions 1. Where the consumer has withdrawn his acceptance of an agreement on the supply of goods or provision of another service by a firm, he shall no longer be bound by his acceptance of any consumer credit agreement linked to that agreement. The agreement shall contain information on the provisions of paragraph 1 and on the procedure and special conditions for exercising the right of withdrawal. If the supplier of goods or services in a linked transaction has acted as credit intermediary, the creditor and the supplier shall be jointly and severally liable for indemnifying the consumer where the goods or services the purchase of which has been financed by the credit agreement are not supplied, or are supplied only in part, or are not in conformity with the contract for their supply. 115 2a. 2. 2b. Where (a) in order to buy goods and obtain services the consumer enters into a credit agreement with a person other than the supplier of them; (b) the grantor of the credit and the supplier of the goods or services have a pre-existing agreement under which credit is made available by that grantor of credit to customers of that supplier for the acquisition of goods and services from that supplier; (c) the consumer referred to in sub-paragraph (a) obtains his credit pursuant to that pre-existing agreement; and (d) the goods or services covered by the credit agreement are not supplied, or are supplied only in part, or are not in conformity with the contract for supply of them; the consumer shall have the right to pursue remedies against the grantor of credit. Member States shall determine to what extent and under what conditions these remedies shall be exercisable. Member States shall take steps to move towards a system which facilitates such remedies within a period of five years from the date hereof. 3. This Article is without prejudice to any provisions in Member States’ legal systems which provide for circumstances in which a creditor will be jointly and severally liable for any claim the consumer may have against the supplier where the purchase of goods or services from the supplier has been financed by a credit agreement. 116 CHAPTER VIII – SPECIFIC CREDIT AGREEMENTS Article 21 Credit agreement in the form of an advance on a current account or a debit account Where a credit agreement covers credit in the form of an advance on a current account or debit account, the consumer shall be regularly informed of his debit situation by means of a statement of account, on paper or on another durable medium, containing the following information: a) the precise period to which the statement of account relates; b) the amounts and dates of drawdowns; c) where applicable, the outstanding balance due from the previous statement, and the date thereof; e) the dates and amounts of payments made by the consumer; f) the last agreed borrowing rate; h) where applicable, the minimum amount to be paid; i) where applicable, the new balance outstanding; Furthermore, the consumer shall be notified in writing during the course of the agreement of all changes in the annual rate of interest and in payable costs at the moment they arise. Article 22 Open-end credit agreements Either party may terminate an open-end credit agreement by giving three months' notice drawn up on paper or on another durable medium in accordance with the procedures laid down in the credit agreement and in accordance with national legislation regarding proof. Fixed-term agreements of long duration cannot be renewed without explicit prior approval of the borrower. 117 CHAPTER IX: PERFORMANCE OF A SURETY AGREEMENT Article 23 Performance of a surety agreement 1. A guarantor may conclude a surety agreement guaranteeing repayment under an open-end credit agreement for a period of three years only. This surety may be extended only with the specific agreement of the guarantor at the end of that period. The creditor may take action against the guarantor only if the consumer, having defaulted on repayment of the credit, has failed to comply with a default notice within three months. The guarantor must be informed as soon as a default notice has been sent to the consumer. 3. The amount guaranteed may only equal the outstanding balance of the total amount of credit and any arrears in accordance with the credit agreement, with the exclusion of any other indemnities or penalties provided for by the credit agreement. 2. 118 CHAPTER X: NON-PERFORMANCE OF A CREDIT AGREEMENT Article 24 Default notice and enforceability 1. Member States shall ensure that: a) creditors, their representatives and any other assignee of the creditor's rights under a credit agreement or surety agreement may not take disproportionate measures to recover amounts due to them in the event of non-performance of such agreements; b) the creditor may demand immediate payment in the event of default or invoke a clause providing an express resolutive condition only through a prior default notice requesting the consumer or, where applicable, the guarantor to comply with his obligations under the agreement within a reasonable period of time; c) the creditor may not suspend the consumer's drawdown rights unless he justifies his decision and is required to inform the consumer without delay; d) in the event of non-performance of their obligations or in the event of early repayment, the consumer and the guarantor are entitled, on request and without delay, to receive a detailed statement of account, free of charge, allowing them to verify the charges and interest claimed. 2. A default notice as referred to in paragraph 1 (b) is not necessary: a) in the event of fraud by the consumer, evidence of which shall be provided by the creditor or the assignee of the creditor's rights; b) where the consumer alienates the property financed before the total amount of credit is repaid or uses the property in a manner inconsistent with the conditions of the credit agreement, and where the creditor or the assignee of the creditor's rights has a preferential claim, right of possession or reservation of title on the property financed, provided that the consumer has been informed of the existence of such preferential claim, right of possession or reservation of title prior to the conclusion of the contract. Article 25 Overrunning of the total amount of credit and tacit overdraft 1. In the event of a significant overrunning of the total amount of credit which endures for a period longer than one month, the creditor shall inform the consumer on paper or on another durable medium, that he has overrun the credit amount and shall inform him of the amount involved, the borrowing rate and/or the penalties, charges or interest on arrears applicable. 3. Any significant overrunning of the total amount of credit which exceeds three months shall be rectified, where necessary through a new credit agreement providing for a higher total amount of credit. 2. 119 CHAPTER XI: REGISTRATION, STATUS AND CONTROL OF CREDITORS AND CREDIT INTERMEDIARIES Article 28 Regulation of creditors and credit intermediaries Member States shall ensure that creditors and credit intermediaries are supervised by a body or authority independent from financial institutions or regulated. Article 29 Obligations of credit intermediaries Member States shall ensure that a credit intermediary: a) indicates in advertising and documentation intended for clients the extent of his powers, in particular whether he works exclusively with one or more creditors or as an independent broker; c) does not receive, directly or indirectly, any fee, in whatever form, from a consumer who has requested his services, unless all the following conditions are met: i) the amount of the fee is stated in the credit agreement, ii) the credit intermediary does not receive a fee from the creditor, iii) the credit agreement for which he has acted is actually concluded. 120 CHAPTER XII: FINAL PROVISIONS Article 30 Total harmonisation and imperative nature of the Directive's provisions 1. 2. Member States may not introduce provisions other than those laid down in this directive. Member States shall ensure that credit agreements and surety agreements do not derogate, to the detriment of the consumer or guarantor, from the provisions of national law implementing or corresponding to this Directive. Member States shall further ensure that the provisions they adopt in implementation of this Directive cannot be circumvented as a result of the way in which agreements are formulated, in particular by integrating drawdowns or credit agreements falling under the scope of this Directive into credit agreements the character or purpose of which would make it possible to avoid its application. Consumers and guarantors may not waive the rights conferred on them by this Directive. Member States shall take the measures needed to ensure that the consumer and the guarantor do not lose the protection granted by this Directive by virtue of the choice of the law of a non-member country as the law applicable to the agreement, if the agreement has a close link with the territory of one or more Member States. Article 31 Penalties Member States shall lay down penalties for infringements of national provisions adopted in application of this Directive, and shall take all necessary measures to ensure that these are enforced. These penalties must be effective, proportionate and constitute a deterrent. They may provide for the loss of interest and charges by the creditor and continuation of the right of repayment in instalments of the total amount of credit by the consumer, in particular where the creditor does not respect the provisions on responsible lending. Member States shall communicate these provisions to the Commission no later than […][2 years after the entry into force of this Directive] and any subsequent amendments concerning them without delay. Article 32 Out-of-court redress Member States shall ensure that adequate and effective complaints and redress procedures for the out-of-court settlement of consumer disputes concerning credit and surety agreements are put in place, using existing bodies where appropriate. Member States shall encourage bodies responsible for the out-of-court settlement of consumer disputes to cooperate in order to resolve cross-border disputes concerning credit and surety agreements. 3. 4. 5. 121 Article 34 Existing agreements This Directive does not apply to credit agreements and surety agreements existing on the date the national implementing measures enter into force. Article 35 Transposition Member States shall adopt and publish, no later than [...][2 years after the entry into force of this Directive] the laws, regulations and administrative provisions necessary to comply with this Directive. They shall immediately inform the Commission thereof. They shall apply these provisions from [...][2 years after the entry into force of this Directive]. When Member States adopt these provisions, these shall contain a reference to this Directive or shall be accompanied by such reference at the time of their official publication. Member States shall determine how such reference is to be made. Article 36 Repeal Directive 87/102/EEC is repealed with effect from [...][the end of the transposition period for this Directive]. Article 37 Entry into force This Directive shall enter into force on the twentieth day following its publication in the Official Journal of the European Communities. Article 38 Addressees This Directive is addressed to the Member States. Done at Brussels, For the Council The President 122 ANNEX I – The basic equation expressing the equivalence of drawdowns on the one hand and repayments and charges on the other The basic equation, which establishes the annual percentage rate of charge (APR), equates, on an annual basis, the total present value of drawdowns on the one hand and the total present value of repayments and payments of charges on the other hand, i.e.: ∑ C (1 + X ) k =1 k m −t k = ∑ Dl (1 + X ) l =1 m' − sl where: – X is the APR – m is the number of the last drawdown – k is the number of a drawdown, therefore 1 ≤ k ≤ m, – Ck is the amount of drawdown k, – tk is the interval, expressed in years and fractions of a year, between the date of the first drawdown and the date of each subsequent drawdown, therefore t1 = 0, – m’ is the number of the last repayment or payment of charges, – l is the number of a repayment or payment of charges, – Dl is the amount of a repayment or payment of charges, – sl is the interval, expressed in years and fractions of a year, between the date of the first drawdown and the date of each repayment or payment of charges. Remarks a) The amounts paid by both parties at different times shall not necessarily be equal and shall not necessarily be paid at equal intervals. b) The starting date shall be that of the first drawdown. c) Intervals between dates used in the calculations shall be expressed in years or in fractions of a year. A year is presumed to have 365 days (or 366 days for leap years), 52 weeks or 12 equal months. An equal month is presumed to have 30.41666 days (i.e. 365/12) regardless of whether or not it is a leap year. d) The result of the calculation shall be expressed with an accuracy of at least one decimal place. If the figure at the following decimal place is greater than or equal to 5, the figure at that particular decimal place shall be increased by one. e) The equation can be rewritten using a single sum and the concept of flows (Ak), which will be positive or negative, in other words either paid or received during periods 1 to k, expressed in years, i.e.: S = ∑ Ak (1 + X ) k =1 n −t k , S being the present balance of flows. If the aim is to maintain the equivalence of flows, the value will be zero. f) Member States shall provide that the methods of resolution applicable give a result equal to that of the examples presented in Annexe II. 123 ANNEX II – Examples of calculation of the annual percentage rate of charge Preliminary remarks Unless otherwise stated, all examples assume a single drawdown of credit equal to the total amount of the credit and placed at the consumer’s disposal as soon as the credit agreement is concluded. In this connection, it should be noted that if the credit agreement gives the consumer freedom of drawdown, the total amount of credit is deemed to be drawn down immediately and in full. Some Member States, in order to express the borrowing rate, have opted for an effective rate and the equivalent conversion method, thus avoiding a situation in which the calculation of periodical interest is carried out in countless ways using different pro rata temporis rules which have only a very vague relationship with the linear nature of time. Other Member States permit a nominal periodic rate using a proportional conversion method. This Directive seeks to separate any further regulation of borrowing rates from the regulation of effective rates, simply stating the rate used. The examples in this Annex refer to the method that has been used. Example 1 Total amount of credit (capital) of € 6 000.00, repayable in four equal annual instalments of € 1 852.00. The equation becomes: 1 1− (1 + X )4 6000 = 1852. X or: 1 1 1 + 1852 + .......... + 1852 6000 = 1852 1 2 (1 + X ) 4 (1 + X ) (1 + X ) giving X = 9.00000%, i.e. an APR of 9.0%. Example 2 Total amount of credit (capital) € 6 000.00, repayable in 48 equal monthly instalments of € 149.31. The equation becomes: 1 1− 48 (1 + X )1 / 12 6000 = 149,31 (1 + X )1 / 12 − 1 or: 1 1 1 + 149,31 + .......... + 149,31 6000 = 149,31 1 / 12 2 / 12 (1 + X ) 48 / 12 (1 + X ) (1 + X ) giving X = 9.380593%, i.e. an APR of 9.4%. [ ] Example 3 Total amount of credit (capital) of € 6 000.00, repayable in 48 equal monthly instalments of € 149.31. Administrative charges of € 60.00 are payable on conclusion of the contract. The equation becomes: 1 1− 48 (1 + X )1 / 12 6000 − 60 = 149,31 (1 + X )1 / 12 − 1 or: [ ] 124 1 1 1 + 149,31 + .......... + 149,31 1 / 12 2 / 12 (1 + X ) (1 + X ) (1 + X ) 48 / 12 giving X = 9.954966%, i.e. an APR of 10%. 5940 = 149,31 Example 4 Total amount of credit (capital) of € 6 000.00, repayable in 48 equal monthly instalments of € 149.31. Administrative charges of € 60.00 are spread over the repayments. The monthly instalment is therefore (€ 149.31 + (€ 60/48)) = € 150.56. The equation becomes: 1 1− 48 (1 + X )1 / 12 6000 = 150,56 (1 + X )1 / 12 − 1 or: 1 1 1 + 150,56 + .......... + 150,56 6000 = 150,56 1 / 12 2 / 12 (1 + X ) 48 / 12 (1 + X ) (1 + X ) giving X = 9.856689%, i.e. an APR of 9.9%. [ ] Example 5 Total amount of credit (capital) of € 6 000.00, repayable in 48 equal monthly instalments of € 149.31. Administrative charges are € 60.00, and insurance € 3.00 per month. The costs associated with insurance premiums must be included in the total cost of the credit if the insurance is taken out when the credit agreement is concluded. The instalment is therefore €152.31. The equation becomes: 1− 5940 = 152,31 [(1 + X ) ] 1 1 / 12 48 (1 + X )1 / 12 − 1 or: 1 1 1 + 152,31 + .......... + 152,31 1 / 12 2 / 12 (1 + X ) 48 / 12 (1 + X ) (1 + X ) giving X = 11.1070115%, i.e. an APR of 11.1%. 5940 = 152,31 Example 6 Balloon-type credit agreement for a total amount of credit of € 6 000.00 (purchasing price of a car to be financed), repayable in 47 equal monthly instalments of € 115.02 plus a final payment of € 1 915.02 representing the residual value of 30% of the capital (balloon agreement), plus insurance of € 3.00 per month. Again, the costs associated with insurance premiums must be included in the total cost of the credit if the insurance is taken out when the credit agreement is concluded. The instalment is therefore € 118.02, and the final payment will amount to € 1 918.02. The equation becomes: 1− 6000 = 118,02 or: [(1 + X ) ] 1 / 12 1 1 / 12 47 (1 + X ) −1 + 1918,02 [(1 + X ) ] 1 1 / 12 48 125 6000 = 118,02 1 1 1 1 + 118,02 + ..........118,02 + (1800 + 115,02 + 3). 1 / 12 2 / 12 47 / 12 (1 + X ) (1 + X ) (1 + X ) (1 + X ) 48 / 12 giving X = 9.381567%, i.e. an APR of 9.4%. Example 7 Credit agreement for a total amount of credit (capital) of € 6 000.00, with administrative charges of € 60.00 payable on conclusion of the contract, and two payment periods of 22 and 26 months respectively. The second-period instalment corresponds to 60% of the first-period instalment. The respective monthly instalments are € 186.36 and € 111.82. The equation becomes: ⎧⎡ 1 1 ⎤ 1− 1− ⎪⎢ 22 26 ⎥ ⎫ 1 (1 + X )1 / 12 + ⎪⎢111,82 (1 + X )1 / 12 ⎥. ⎪ 5940 = 186,36 ⎨⎢ 1 / 12 1 / 12 22 ⎬ (1 + X ) − 1 (1 + X ) − 1 ⎥ (1 + X )1 / 12 ⎪ ⎪⎢ ⎭ ⎥ ⎪⎢ ⎥ ⎦ ⎩⎣ or: ⎡ ⎤ 1 1 1 + 186,36 + .......... + 186,36 + 5940 = ⎢186,36 1 / 12 2 / 12 22 / 12 ⎥ (1 + X ) (1 + X ) (1 + X ) ⎣ ⎦ [ ] [ ] [ ] ⎧⎡ ⎤ 1 1 1 1 ⎪ + 111,82 + .......... + 111,82 . ⎨⎢111,82 1 / 12 2 / 12 26 / 12 ⎥ (1 + X ) (1 + X ) (1 + X ) ⎪⎣ ⎦ (1 + X )1 / 12 ⎩ giving X = 10.04089%, i.e. an APR of 10.0%. [ ] ⎫ ⎪ 22 ⎬ ⎪ ⎭ Example 8 Credit agreement for a total amount of credit (capital) of € 6 000.00, with administrative charges of € 60.00 payable on conclusion of the contract, and two payment periods of 22 and 26 months respectively, the first-period instalment corresponding to 60% of the second-period instalment. The respective monthly instalments are € 112.15 and € 186.91. The equation becomes: ⎧⎡ 1 1 ⎤ 1− 1− ⎪⎢ 1 / 12 22 1 / 12 26 ⎥ ⎫ 1 (1 + X ) (1 + X ) ⎪ ⎪ ⎥. + ⎨⎢186,91 5940 = 112,15 ⎬ 1 / 12 1 / 12 1 / 12 22 (1 + X ) − 1 ⎥ (1 + X ) (1 + X ) − 1 ⎪ ⎪⎢ ⎭ ⎥ ⎪⎢ ⎥ ⎣ ⎦ ⎩⎢ or: ⎡ ⎤ 1 1 1 + 112,15 + .......... + 112,15 + 5940 = ⎢112,15 1 / 12 2 / 12 22 / 12 ⎥ (1 + X ) (1 + X ) (1 + X ) ⎣ ⎦ [ ] [ ] [ ] ⎧⎡ ⎤ 1 1 1 1 ⎪ + 186,91 + .......... + 186,91 . ⎨⎢186,91 1 / 12 2 / 12 26 / 12 ⎥ (1 + X ) (1 + X ) (1 + X ) ⎪⎣ ⎦ (1 + X )1 / 12 ⎩ giving X = 9.888383%, i.e. an APR of 9.9%. [ ] ⎫ ⎪ 22 ⎬ ⎪ ⎭ Example 9 Credit agreement for a total amount of credit (price of goods) of € 500.00, repayable in three equal monthly instalments calculated by applying the borrowing rate T of 18% (nominal rate), plus administrative charges of € 30.00 spread over the payments. The monthly instalment is therefore € 171.69 + € 10.00 charges = € 181.69. The equation becomes: 126 1− 500 = 181,69 [(1 + X ) ] 1 1 / 12 3 (1 + X )1 / 12 − 1 or: 1 1 1 + 181,69 + 181,69 1 / 12 2 / 12 (1 + X ) (1 + X ) (1 + X ) 3 / 12 giving X = 68.474596%, i.e. an APR of 68.5%. This example typifies practices still used by certain specialist "vendor-credit" establishments. 500 = 181,69 Example 10 Credit agreement for a total amount of credit (capital) of € 1 000, repayable in two instalments of either € 700.00 after one year and € 500.00 after two years, or € 500.00 after one year and € 700.00 after two years The equation becomes: 1 1 1000 = 700 + 500 24 1 / 12 12 (1 + X )1 / 12 (1 + X ) giving X = 13.898663%, i.e. an APR of 13,9%. or: 1 1 1000 = 500 + 700 24 1 / 12 12 (1 + X )1 / 12 (1 + X ) giving X = 12.321446%, i.e. an APR of 12.3%. This example shows that the annual percentage rate of charge depends on the payment periods and that stating the total cost of the credit in the prior information or in the credit agreement is of no benefit to the consumer. Despite the total cost of credit being € 200 in both cases, there are two different APRs (depending on the speed of repayment). [ ] [ [ ] ] [ ] Example 11 Credit agreement for a total amount of credit of € 6 000, with a borrowing rate of 9%, repayment in four equal annual instalments of € 1 852.01, and administrative charges of € 60.00 payable on conclusion of the agreement. The equation becomes: 1 1− (1 + X )4 5940 = 1852,01 X or: 1 1 1 5940 = 1852,01 + 1852,01 + .......... + 1852,01 2 (1 + X ) (1 + X ) (1 + X ) 4 giving X = 9.459052%, i.e. an APR of 9.5%. In the event of early repayment, the equations become: After one year: 1 5940 = 6540 (1 + X ) where 6540 is the sum due, including interest, before payment of the first scheduled payment according to the amortisation table, giving X = 10.101010%, i.e. an APR of 10.1%. After two years: 1 1 5940 = 1852,01 + 5109,91 (1 + X ) (1 + X ) 2 127 where 5109.91 is the sum due, including interest, before payment of the second scheduled payment according to the amortisation table, giving X = 9.640069%, i.e. an APR of 9.6%. After three years: 1 1 1 5940 = 1852,01 + 1852,01 + 3551,11 2 (1 + X ) (1 + X ) (1 + X ) 3 where 3551.11 is the sum due, including interest, before payment of the third scheduled payment according to the amortisation table, giving X = 9.505315%, i.e. an APR of 9.5% This shows how the provisional APR decreases in the course of time, especially where charges are payable on conclusion of the agreement. This example can also serve to illustrate the case of a mortgage credit intended to refinance current credit agreements where the costs (notary's fees, registration, taxes) are due when the authenticated act is completed and the funds are made available to the consumer from the same date. Example 12 Credit agreement for a total amount of credit of € 6 000, with a borrowing rate T of 9% (nominal rate), repayment in 48 monthly instalments of € 149.31 (calculated proportionally), and administrative charges of € 60.00 payable on conclusion of the agreement. The equation becomes: 1 1− 48 (1 + X )1 / 12 5940 = 149,31 (1 + X )1 / 12 − 1 or: 1 1 1 5940 = 149,31 + 149,31 + .......... + 149,31 1 / 12 2 / 12 (1 + X ) (1 + X ) (1 + X ) 48 / 12 giving X = 9.9954957%, i.e. an APR of 10%. However, in the case of early repayment, this becomes: After one year: 1 1− 11 1 (1 + X )1 / 12 + 4844,64 5940 = 149,31 1 / 12 12 (1 + X )1 / 12 (1 + X ) −1 [ ] [ ] [ ] where 4844.64 is the sum due, including interest, before payment of the 12th scheduled payment according to the amortisation table, giving X=10.655907%, i.e. an APR of 10.7%. After two years: 1 1− 23 1 (1 + X )1 / 12 + 3417,58 5940 = 149,31 1 / 12 24 (1 + X ) − 1 (1 + X )1 / 12 [ ] [ ] where 3417.58 is the sum due, including interest, before payment of the 24th monthly instalment according to the amortisation table, giving X = 10.136089%, i.e. an APR of 10.1%. After three years: 1 1− 35 1 (1 + X )1 / 12 + 1856,66 5940 = 149,31 1 / 12 36 (1 + X ) − 1 (1 + X )1 / 12 [ ] [ ] 128 where 1856.66 is the sum due, including interest, before payment of the 36th monthly instalment according to the amortisation table, giving X = 9.991921%, i.e. an APR of 10%. Example 13 Total amount of credit (capital) of € 6 000.00, repayable in four equal annual instalments of € 1 852.00. Let us now assume that the borrowing rate (nominal rate) is variable and increases from 9.00% to 10.00% after the second annual instalment. This results in a new annual instalment of € 1 877.17. Remember that, in calculating the APR, it is normally assumed that the borrowing rate and other costs remain fixed at the initial level and apply until the end of the credit agreement. In that case (example 1), the APR will be 9%. In the event of any change to the rate, the new APR must be communicated and calculated on the assumption that the credit agreement will remain in force for the rest of the agreed duration, and that the creditor and consumer will fulfil their obligations under the terms and by the dates agreed. The equation becomes: 1 1 ⎡ ⎤ 1− 1− 2 2 ⎢ (1 + X ) + ⎢1877,17 (1 + X ) . 1 ⎥ ⎥ 5940 = 1852,01 X X X2⎥ ⎢ ⎢ ⎥ ⎣ ⎦ or: ⎧⎡ ⎤ 1 ⎫ 1 1 1 1 + 1852,01 + ⎨⎢1877,17 + 1877,17 5940 = 1852,01 + ⎬ 2 3 4 ⎥ (1 + X ) (1 + X ) (1 + X ) (1 + X ) ⎦ X 2 ⎭ ⎩⎣ giving X = 9.741569, i.e. an APR of 9.7%. Example 14 Total amount of credit (capital) of € 6 000.00, repayable in 48 equal monthly instalments of € 149.31, with administrative charges of € 60.00 payable on conclusion of the agreement, plus insurance of € 3.00 per month. The costs associated with insurance premiums must be included in the total cost of the credit if the insurance is taken out when the credit agreement is concluded. The instalment is therefore € 152.31 and the calculation, as in example 5, gives X = 11.107112, i.e. an APR of 11.1%. Let us now assume that the borrowing rate (nominal) is variable and increases to 10% after the 17th payment. This change requires a new APR to be communicated and calculated on the assumption that the credit agreement will remain in force for the rest of the agreed duration, and that the creditor and consumer will fulfil their obligations under the terms and on the dates agreed. The equation becomes: 1 1 ⎤ ⎡ 1− 1− 17 ⎥ ⎢ 1 / 12 1 / 12 31 1 (1 + X ) (1 + X ) ⎥ ⎢154,22 5940 = 151,91 . + 1 / 12 1 / 12 1 / 12 17 ⎥ ⎢ (1 + X ) − 1 (1 + X ) − 1 (1 + X ) ⎥ ⎢ ⎥ ⎢ ⎦ ⎣ or: ⎡ ⎤ 1 1 1 5940 = ⎢151,91 + + 151,91 + .......... + 151,91 1 / 12 2 / 12 17 / 12 ⎥ (1 + X ) (1 + X ) (1 + X ) ⎦ ⎣ [ ] [ ] [ ] ⎧⎡ ⎤ 1 1 1 1 ⎪ . + 154,22 + .......... + 154,22 ⎨⎢154,22 1 / 12 2 / 12 31 / 12 ⎥ (1 + X ) (1 + X ) (1 + X ) ⎪⎣ ⎦ (1 + X )1 / 12 ⎩ [ ] ⎫ ⎪ 17 ⎬ ⎪ ⎭ 129 giving X = 11.542740%, i.e. an APR of 11,5%. Example 15 Credit agreement of the "leasing" type for a car with a value of € 15 000.00. The agreement stipulates 48 monthly instalments of € 350. The first monthly instalment is payable as soon as the car is placed at the consumer’s disposal. At the end of the 48 months the purchase option may be taken up by paying the residual value of € 1 250. The equation becomes: 1 1− 47 1 (1 + X )1 / 12 + 1250 14650 = 350 1 / 12 48 (1 + X )1 / 12 (1 + X ) −1 [ ] [ ] or: 1 1 1 1 + 350 + .......... + 350 + 1250 1 / 12 2 / 12 47 / 12 (1 + X ) (1 + X ) (1 + X ) (1 + X ) 48 / 12 giving X = 9.541856%, i.e. an APR of 9.5%. 14650 = 350 Example 16 Credit agreement of the “financing”, “vendor credit” or “hire purchase” type for goods with a value of € 2 500. The credit agreement provides for a down-payment of € 500 plus 24 monthly instalments of € 100, the first of which must be paid within 20 days of the goods being placed at the consumer’s disposal. In such cases the down-payment is never part of the financing operation. The equation becomes: 1 1− 24 1 (1 + X )1 / 12 (2500 − 500). = 100 ⎤ ⎡ 365 (1 + X )1 / 12 − 1 1 / 365 ⎢ 12 − 20 ⎥ ⎦ (1 + X ) ⎣ or: 1 1 1 1 2000. = 100 + 100 + .......... + 100 10 , 4316 1 / 12 2 / 12 (1 + X ) (1 + X ) (1 + X ) 24 / 12 (1 + X ) 365 [ ] [ ] giving X = 20.395287, or an APR of 20.4%. Example 17 Credit agreement for a credit line of € 2 500 for a period of six months. The credit agreement provides for payment of the total cost of the credit every month and repayment of the total amount of the credit at the end of the agreement. The annual borrowing rate (effective rate) is 8 %, and the charges amount to 0.25 % per month. The assumption that the amount of credit is drawn down immediately and in full applies here. The monthly borrowing interest payment is calculated on the basis of an equivalent monthly rate, using the equation: 1 / 12 a = 2500. (1,08) − 1 + 0,25} or: a = 2500 .(0,006434 + 0,0025) = 22,34 This becomes: 1 1− 6 1 (1 + X )1 / 12 + 2500 2500 = 22,34 1 / 12 (1 + X ) − 1 (1 + X )6 / 12 or: {[ ] [ ] 130 1 1 1 1 + 22,34 + .......... + 22,34 + 2500 1 / 12 2 / 12 6 / 12 (1 + X ) (1 + X ) (1 + X ) (1 + X ) 6 / 12 giving X = 11.263633 i.e. an APR of 11.3%. 2500 = 22,34 Example 18 Credit agreement for an open-end credit line of € 2 500. The agreement provides for a minimum half-yearly payment of 25% of the outstanding balance (capital and interest), with a minimum of € 25. The annual borrowing rate (effective rate) is 12%, and the administrative charge payable on conclusion of the agreement is € 50. (The equivalent monthly rate is obtained by the equation: i = (1 + 0,12) 6 / 12 − 1 = 0,00583 or 5.83%). The 19 half-yearly repayments (Dl) can be obtained from an amortisation table, giving D1 = 661.44; D2 = 525; D3 = 416.71; D4 = 330.75; D5 = 262.52; D6 = 208,37 ; D7 = 165.39; D8 = 208.37; D9 = 104.20; D10 = 82.70; D11 = 65.64; D12 = 52.1; D13 = 41.36; D14 = 32.82; D15 = 25; D16 = 25; D17 = 25; D18 = 25; D19 = 15.28. The equation becomes: 1 1 1 1 2500 − 50 = 661,44 + 525 + .......... + 25 + 15,28 6 / 12 12 / 12 108 / 12 (1 + X ) (1 + X ) (1 + X ) (1 + X )114 / 12 Giving X = 13.151744%, i.e. an APR of 13.2%. Example 19 Credit agreement for an open-end credit line involving the use of a card for drawdowns. Total amount of the credit: € 700. The agreement provides for a minimum monthly payment of 5% of the outstanding balance (capital and interest), and the scheduled instalment (a) may not be less than € 25. The annual cost of the card is € 20. The annual borrowing rate (effective rate) is 0% for the first instalment and 12% for the subsequent instalments. The 31 monthly repayment amounts (Dl) can be obtained from an amortisation table, giving D1 = 55.00; D2 = 33.57; D3 = 32.19; D4 = 30.87; D5 = 29.61; D6 = 28.39; D7 = 27.23; D8 = 26.11; D9 = 25.04; D10 à D12 = 25.00; D13 = 45; D14 à D24 = 25,00 ; D25 = 45 ; D26 à D30 = 25.00; D31 = 2.25. The equation becomes: 1 1 1 1 700 = 55 + 33,57 + .......... + 25 + 2,25 1 / 12 2 / 12 30 / 12 (1 + X ) (1 + X ) (1 + X ) (1 + X ) 31 / 12 giving X = 18.470574, i.e. an APR of 18.5% Example 20 Open-end credit line in the form of an advance on a current account. Total amount of credit: € 2 500. The credit agreement does not impose any requirements in terms of repayment of capital, but provides for monthly payment of the total cost of the credit. The annual borrowing rate is 8% (effective rate). The monthly charges amount to € 2.50. It is assumed that the full amount of credit will be drawn down, with repayment in theory after one year. First of all, the theoretical scheduled payment of interest and charges (a) is calculated 1 / 12 a = 2500. (1,08) − 1 + 2,50 , { [ ] then: 1− 2500 = 18,59 [(1 + X ) ] 1 / 12 1 1 / 12 12 (1 + X ) −1 + 2500 (1 + X ) 1 1 / 12 12 131 i.e.: 1 1 1 1 + 18,59 + .......... + 18,59 + 2500 1 / 12 2 / 12 12 / 12 (1 + X ) (1 + X ) (1 + X ) (1 + X )12 / 12 giving X = 9.295804, i.e. an APR of 9.3%. 2500 = 18,59 132 ANNEX III – Calculation of the annual percentage rate of charge for a contract requiring advance or accompanying savings and for which the borrowing rate is set to reflect the level of savings Symbols used: – C = Capital – N = duration in years – T = annual borrowing rate – A = annuity – F = periodicity – n = duration in periods – t = periodic borrowing rate – a = periodic repayment. – M = saving period 1. MIXED CREDIT AGREEMENT WITH (COMPULSORY) SAVINGS IN ADVANCE First example The granting of a credit C totalling € 6000 over N = two years is subject to the saving in advance over M = two years of half of the said amount, i.e. € 3000 in all, of which the final amount saved is € 125 and is deposited one month prior to the drawdown of the credit. The savings in question attract no interest but the borrowing rate for the credit agreement will amount to no more than T = 6% at a time when market conditions are setting a rate of 9% instead. The amount saved each month is e = € 125.00, the monthly repayment a = € 140.91, the APR, excluding savings, is 6.17% or 6.2%. To find the annual percentage rate applicable to the transaction as a whole the formula is as follows: 1 1 ⎤ ⎡ ⎤ ⎡ 1− 24 48 ⎥ ⎢ 1− ⎥ ⎢ (1 + X )1 / 12 . (1 + X )1 / 12 25 ⎥ + ⎢140,91 (1 + X )1 / 12 ⎥ 6000 + 3000 = ⎢125 , ⎢ ⎥ ⎢ (1 + X )1 / 12 − 1 (1 + X )1 / 12 − 1 ⎥ ⎥ ⎢ ⎥ ⎢ ⎥ ⎢ ⎥ ⎢ ⎦ ⎣ ⎦ ⎣ or: ⎧⎡ ⎤ 1 1 1 1 / 12 25 6000 + 3000 = ⎨⎢125 . (1 + X ) + 125 + .......... + 125 1 / 12 2 / 12 24 / 12 ⎥ (1 + X ) (1 + X ) (1 + X ) ⎦ ⎩⎣ [ ] [ ] [ ] [ ] } ⎡ ⎤ 1 1 1 + ⎢140,91 + 140,91 + .......... + 140,91 ⎥ (1 + X )1 / 12 (1 + X ) 2 / 12 (1 + X ) 48 / 12 ⎦ ⎣ To solve the equation using a recursive method, let X1 = 0.062, and the value of the first member calculated as 170.5, then X2 = 0.063 and the value of the first member is calculated as 163.3 and so forth then X26 = 0.087 and the value of the first member is calculated at 6.0 then X27 = 0.088 and the value of the first member is calculated at 0.1 then X28 = 0.089 and the value of the first member is calculated at -5.7. The correct solution is X = 8.802245%, or 8.8% and this is the APR to be given to the consumer as the APR for the credit agreement involving an amount to be saved in advance. 133 Second example The granting of a credit C totalling € 6000 over N = two years is subject to the saving in advance over M = two years of half of the said amount, i.e. € 3000 in all, of which the final amount saved is € 125 and is deposited one month prior to the drawdown of the credit. These savings attract a lending rate of S = 3% and the borrowing rate is only T = 6% at a time when market conditions set rates at 9%. The amount saved each month is e = € 125.00, the monthly repayment a = € 140.91, the APR, excluding savings is 6.17% or 6.2%. The updated future value of M will be M’ calculated according to the following formula: (1 + i ) n − 1 M ' = 125. i , where i = (1 + S )1 / 12 − 1 and n = 24 months or: (1,03) 24 / 12 − 1 = 3086,65 (1.03)1 / 12 − 1 and M ' (t 0 ) = 3086,65.(1,03)1 / 12 = 3094,26 where t0 = time of credit drawdown. To find the APR for the transaction as a whole: 1 1 ⎤ ⎡ ⎤ ⎡ 1− 1− 24 ⎢ ⎥ ⎢ 1 / 12 1 / 12 48 ⎥ (1 + X ) (1 + X ) 1 / 12 25 ⎥ ⎥ + ⎢140,91 . (1 + X ) 3094,26 + 6000 = ⎢125 1 / 12 1 / 12 ⎢ ⎥ ⎢ (1 + X ) − 1 ⎥ (1 + X ) − 1 ⎥ ⎢ ⎥ ⎢ ⎥ ⎢ ⎥ ⎢ ⎦ ⎣ ⎦ ⎣ or: ⎧⎡ ⎤ 1 1 1 1 / 12 3094,26 + 6000 = ⎨⎢125 . (1 + X ) + 125 + .......... + 125 1 / 12 2 / 12 24 / 12 ⎥ (1 + X ) (1 + X ) (1 + X ) ⎦ ⎩⎣ M ' (t −1 ) = 125. [ ] [ ] [ ] [ ] 25 } ⎡ ⎤ 1 1 1 + ⎢140,91 + 140,91 + .......... + 140,91 1 / 12 2 / 12 48 / 12 ⎥ (1 + X ) (1 + X ) (1 + X ) ⎣ ⎦ To solve the equation a recursive method can again be used with X = 7.484710, or an APR of 7.5%. 2. 2.1. 2.2. MIXED AGREEMENT WITH ACCOMPANYING SAVINGS Mixed credit agreement with optional savings (advances to current account) See Annex II, example 20. Savings do not form part of the APR calculation. Credit agreement with mixed life assurance These are endowment-type mortgages such as those referred to in Article 20 of this Directive, where saving forms part of the agreement. Let the total amount of credit be € 6000 to be repaid in four annuities at a borrowing rate of 9% but structured as repayments in fine. Suppose that the manager of the fund has paid at the end of each of the three first years an amount of € 1200.00 and that this amount saved has attracted 4%. The balance of this account, before the final repayment is due, will be € 3895.76. It will then be necessary for him to add an additional € 2104.24. His timetable will be for three annuities at € 1740.00 and one at € 2644.24 for a capital of € 6000. 134 The formula: 1− 6000 = 1740. (1 + X )3 X 1 + 2644,24. 1 ((1 + X )4 or: 1 1 1 1 + 1740. + 1740. + 2644,24. 1 2 3 (1 + X ) (1 + X ) (1 + X ) (1 + X )4 and X = 10.955466, or an APR of 10.96%. 6000 = 1740. 135 Annex 2: The Consultation Code of Practice Criteria 1. Consult widely throughout the process, allowing a minimum of 12 weeks for written consultation at least once during the development of the policy. 2. Be clear about what your proposals are, who may be affected, what questions are being asked and the timescale for responses. 3. Ensure that your consultation is clear, concise and widely accessible. 4. Give feedback regarding the responses received and how the consultation process influenced the policy. 5. Monitor your department’s effectiveness at consultation, including through the use of a designated consultation co-ordinator. 6. Ensure your consultation follows better regulation best practice, including carrying out a Regulatory Impact Assessment if appropriate. The complete code is available on the Cabinet Office’s web site, address http://www.cabinet-office.gov.uk/servicefirst/index/consultation.htm. Comments or complaints If you wish to comment on the conduct of this consultation or make a complaint about the way this consultation has been conducted, please write to Nick Van Benschoten, DTI Consultation Co-ordinator, Room 723, 1 Victoria Street, London SW1H 0ET or telephone him on 020 7215 6206 or email to: nick.vanbenschoten@dti.gsi.gov.uk 136 Annex 3: List of Individuals/ Organisations consulted We have emailed this consultation document to our database of approximately 1500 stakeholders who have requested all forthcoming consumer credit consultations. They comprise lenders, trade associations, consumer groups, academics and individuals. If you require a copy of the listing - which runs to 20 pages - please email: nigel.creswick@dti.gsi.gov.uk End DTI Consumer & Competition Policy February 2005 137